ACCELERATING CHINA’S URBAN TRANSITION PRIORITY ACTIONS FOR HIGH-QUALITY GROWTH AND ENHANCING LEADERSHIP FOR CARBON NEUTRALITY Residential buildings surrounded by trees and vegetation in Chengdu, Sichuan, China. Credit: LP2 Studio / Shutterstock.

About this report Accelerating China’s Urban Transition is part of a report series from the Coalition for Urban Transitions. This report is a sister report to Seizing China’s Urban Opportunity: Cities at the heart of the 14th Five-Year Plan and a national vision for net-zero emissions, which includes original climate and economic analysis and modelling to support the COP26 UN climate conference, and which informs this report.

Accelerating China’s Urban Transition also draws from and builds on research from China’s New Urbanisation Opportunity: A Vision for the 14th Five-Year Plan, which called for a new model of urbanisation in China to help drive high-quality economic growth while avoiding environmental costs. It examined China’s historical transformation over the years to a predominantly urban society and identified three previous engines of growth and contrasted them with three new engines.

Accelerating China’s Urban Transition complements these two reports by delving deeper into how cities can support the country to accelerate towards sustained, high-quality growth and carbon neutrality. It provides a detailed exploration of the economic case for transforming China’s urban development model, outlines key priority actions to be taken in specific sectors and sets out strategies for financing this transformation.

Cover photo: High-rise buildings in Hong Kong. Credit: Mandy Choi on Unsplash. Acknowledgements Ehtisham Ahmad, Boping Chen, Alex Clark, Helen Ding, Nick Godfrey, Manisha Gulati, Wee Kean Fong, Robin King, Tom Lindsay, Barjor Mehta, Jing Meng, Luke Sherlock, Lu Sun, Zhigao Wang, Dimitri Zenghelis and Gengtian Zhang. Lord Nicholas Stern, Bob Ward (Grantham Research Institute / London School of Economics), Professor Qi Ye (Hong Kong University of Science and Technology / Tsinghua University), Dr. Fang Li (World Resources Institute [USA] Beijing Representative Office) and Ani Dasgupta (World Resources Institute) provided important guidance to the research as members of the Steering Committee. Kerry LePain played a key role in coordinating the project on behalf of project partners. Zhao Ting provided project management support. The authors are also grateful to Georgina Kyriacou and Kate Musgrave, who copy-edited the report, and Lance Bellers, who designed the report. The Mandarin translation was provided by Wang Qiong, Zhou Jingxuan, Jiang Fengyi and Tang Yiran, copy-edited by Xie Lang and designed by Zhang Ye.

Authors Lead author: Jasmine Tillu Jasmine Tillu is a Policy Fellow at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science. Jasmine wrote the Chapters 1, 2 and 4 and the Conclusion to this report.

Co-authors: Qi Ye, Song Qijiao, Qiu Shiyong, Kerry LePain, Liu Daizong and Zhang Jin Professor Qi Ye is Professor at the School of Public Policy and Management at Tsinghua University, Director of the Institute for Public Policy at Hong Kong University of Science and Technology, and Head of Innovation, Policy and Entrepreneurship Thrust Area at Hong Kong University of Science and Technology (Guangzhou). Song Qijiao is a Postdoctoral Fellow at the Institute for Public Policy at Hong Kong University of Science and Technology. Qiu Shiyong is a Research Analyst at World Resources Institute [USA] Beijing Representative Office. Kerry LePain is a Programme Delivery Associate with the Coalition for Urban Transitions. Liu Daizong is Director of WRI China Ross Center for Sustainable Cities. Zhang Jin is a Ph.D. candidate at the School of Public Policy and Management at Tsinghua University. The contributing authors wrote Chapter 3 and played a role in shaping the overall report.

Disclaimer

This research has been carried out under the auspices of the Grantham Research Institute on Climate Change and the Environment and Professor Qi Ye in conjunction with colleagues from Tsinghua University, Hong Kong University of Science and Technology, WRI China and LSE Cities. The views reflected in this report do not necessarily reflect the views of the wider membership of the Coalition for Urban Transitions or the UK government.

This material has been funded by the UK government; however, the views expressed do not necessarily reflect the UK government’s official policies. Table of contents

Executive summary 7 Chapter 1 10 Introduction

Chapter 2 12 Chapter 3 25 The economic case for China’s Priority national policy actions to realise sustainable urban transformation China’s sustainable urban transformation

Chapter 4 34 The way forward 41 Financing China’s sustainable urban transformation

4 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality Abbreviations

ASI avoid-shift-improve

BRI Belt and Road Initiative

CCC clean, compact and connected cities

CNY Chinese Yuan Renminbi (Currency Unit)

EMC energy management contract

EV electric vehicle

FDI foreign direct investment

GEP gross ecosystem product

GDP gross domestic product

GtCO2-e gigatonnes of carbon dioxide equivalent g/m3 grams per cubic metre

GW gigawatts

IoT Internet of Things

Jing-Jin-Ji Beijing-Tianjin-Hebei

LGFV local government financing vehicle

MaaS Mobility as a Service

MEE Ministry of Ecology and Environment

PBOC People’s Bank of China

PM particulate matter

UHV ultra-high voltage

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 5 Beijing. China. Retirees spend their leisure time in the park – dance, acrobatics and Tai Chi. Credit: Bagrin Ego / Shutterstock.

Executive summary

IMPACTS OF THE PACE AND SCALE OF Cities and how they are built – their ‘urban form’ – have CHINA’S URBANISATION strong lock-in effects that can last for decades, if not centuries. Amplified urban sprawl feeds inefficiencies The strength and quality of China’s growth in that affect productivity and innovation, and expands the coming decades depend on how its cities into prime agricultural land, reducing resilience to develop. Rapid urbanisation has been central natural disasters and health pandemics. Increasingly to China’s economic success story but China’s evident is how climate change and fossil fuel use in future development is threatened by increasing air China are threatening the economic stability of its cities. pollution, traffic congestion, social inequities and Accelerating the human-centric ‘new urbanisation other pressures in cities. These problems have been strategy’ outlined in the 14th Five-Year Plan will labelled ‘urban diseases’ by the government and enable China’s sustainable urban transition to the country has made significant strides to alleviate happen more quickly and allow China to reach them, but they are preventing cities from reaching higher quality growth sooner. Strategic low-carbon their full economic potential. and sustainable urban infrastructure investments In the next three to four decades, the urban and supportive spatial policies for developing clean, population is estimated to reach 75–80 per cent of compact and connected cities will unlock a myriad the total population. Ensuring that China’s next 200 of economic, environmental and social benefits. million urban residents breathe, move and work It is critical to focus on energy, buildings, ‘new productively could put the country on a trajectory infrastructure’ and transport sector investments to prosperity and wellbeing. Conversely, polluted, and apply fiscal strategies that both empower inefficient and congested cities will undermine municipalities and incentivise these types of China’s growth path. investments. By acting rapidly on these fronts,

6 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality many Chinese cities could peak their carbon dioxide Further, if China makes an early entry into emerging emissions before 2025, allowing a national peak urban infrastructure and technologies, it can secure by 2025, a target some climate economists have its future competitiveness in the global low-carbon suggested is necessary to place China on a viable economy. Exports of low-carbon urban technology, pathway to reach its 2060 carbon neutrality pledge. goods, talent and services would unleash long-term economic dividends for Chinese companies but The form and trajectory of the further urbanisation also lock standards and technologies into low- that takes place in China will have long-term carbon urban infrastructure over the long term. implications for the country and the world’s Urbanisation can also play a supporting role in economic and environmental outcomes. The 14th China’s regional rebalancing goals through the Five-Year Plan period, 2021 to 2025, is a crucial development of smaller, well-planned CCC cities in window of opportunity to act on these issues. the country’s interior. ECONOMIC BENEFITS FROM Current economic models fail to fully capture both TRANSFORMING CHINA’S URBAN the powerful dynamics and the very attractive DEVELOPMENT MODEL qualities found in less tangible forms of capital, such as social capital, natural capital and some forms The shape and layout of cities greatly affect their of human capital. As a result, the benefits outlined ability to thrive. The benefits of clean, compact above likely grossly underestimate the full range of and connected cities (or ‘CCC cities’) are significant economic and social benefits of CCC cities. and their development would be in line with the 14th Five-Year Plan’s human-centric ‘new Recommendations for unlocking the urbanisation strategy’, which shows recognition economic potential of cities of the importance of cities to China’s future economic and ecological goals. „ Embed the 14th Five-Year Plan’s human- centric ‘new urbanisation strategy,’ which Clean, compact and connected cities are associated incorporates sustainable urban development, with direct cost savings, increased productivity and at the centre of forthcoming sectoral and innovation and improved resilience to economic and municipal implementation plans. climate shocks. A recent analysis by the Coalition for Urban Transitionsa found that a series of technically- „ Include and prioritise robust indicators feasible investments in low-carbon infrastructure within the municipal government could generate CNY50 trillion (US$7.7 trillion) in performance system that reflect and returns by 2050 and create more than 15 million new encourage the 14th Five-Year Plan’s jobs, while reducing almost 90 per cent of carbon human-centric ‘new urbanisation strategy’. emissions in Chinese cities. „ Ensure a holistic cost-benefit analysis that is consistent with principles of the human- centric ‘new urbanisation strategy’ is carried Strategic low-carbon and out on urban infrastructure projects. sustainable urban infrastructure „ Improve the international competitiveness investments and supportive spatial of Chinese cities by systematically benchmarking their sustainable urban policies for developing clean, development progress against global peers. compact and connected cities „ Incentivise low-carbon urban development will unlock a myriad of economic, by assigning specific, verifiable emission reduction responsibilities and prioritise environmental and social benefits. city-level carbon inventory systems.

a Coalition for Urban Transitions (2021) Seizing China’s Urban Opportunity: Cities at the heart of the 14th Five-Year Plan and a national vision for net-zero emissions.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 7 PRIORITY NATIONAL POLICY ACTIONS FINANCING CHINA’S URBAN TRANSITION TO TRANSFORM CHINA’S URBAN To meet China’s climate goals under the Paris DEVELOPMENT MODEL Agreement, China needs to spend an estimated The central government can take specific actions CNY138 trillion (US$20 trillion) over the next three in the energy, buildings, ‘new infrastructure’ decades across all sectors. As cities are the primary and transport sectors to support clean, compact source of China’s carbon emissions, much of this and connected cities. Practical decarbonisation investment is needed in the form of low-carbon pathways require coordinated governance in urban urban infrastructure. Decades of rapid infrastructure areas, tailored to and aligned with local economic growth, initially funded through the sale of land use development goals. rights and off-budget investment vehicles, have left many municipalities in deep debt. This situation has Recommendations for national policy prompted concerns over the long-term ability of cities actions to sufficiently meet the financing needs of a low- carbon transition. „ Strengthen coordinated governance. Meeting this financing challenge will require a multi- „ Decarbonise cities’ energy systems through layered fiscal strategy that empowers municipalities stricter standards on coal-fired power plants with sufficient financial resources and incentivises and promoting renewable energy. low-carbon urban investments over the long term.

„ Enhance energy efficiency in the buildings Recommendations for financing the sector through enforcing green building urban transition standards and supporting deep retrofits. „ Stabilise municipal financing through „ Emphasise ‘rational’, smart, low-carbon and own-source revenues. resilient development in the construction of ‘new infrastructure’. „ Prioritise strengthening systems for data collection and data sharing. „ Implement an integrated ‘avoid–shift–improve’ strategy for green transport. „ Include minimum environmental thresholds for projects funded by special purpose bonds.

„ Scale up environmental information disclosure.

„ Develop a clear taxonomy system for green bonds that defines the difference between sustainable and ‘brown’ projects or infrastructure.

8 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality Photovoltaic power generation in Chongqing. Credit: WangAnQ / iStock.

1. Introduction

The unprecedented scale of China’s transformation and wellbeing. Conversely, polluted, inefficient and into an urban-majority country over recent decades congested cities will undermine China’s growth. In is among one of the most significant global trends of recognition of this, China has envisioned a concept the past half century. China’s urban story is not only of development called ‘ecological civilisation’, which evident in the cityscapes of Shanghai and Shenzhen: melds the balancing of environmental protection it can also be measured across a wide range of with economic growth and a host of social goals. economic and social indicators, from income levels China’s historic climate goals announced in 2020 – to life expectancy. However, environmental and for carbon neutrality, or net-zero carbon emissions, climate challenges are growing increasingly urgent by 2060, and a carbon dioxide emissions peak before to address, including air pollution, urban sprawl, 2030 – underscore its commitment to a sustainable natural disasters and greenhouse gas emissions. model of development. Although the government has taken significant steps to alleviate them, these challenges are starting to THE 14TH FIVE-YEAR PLAN: A CRITICAL undermine the economy, hampering efforts to attain the goal of higher quality growth. TIME PERIOD

China’s growth over the past few decades has been How China steers its development in cities within largely driven by the productive activities within the 14th Five-Year Plan period of 2021 to 2025 will its urban areas. The strength and quality of China’s determine how quickly it can reach high-quality growth in the coming decades depend on how its growth overall. China’s promotion of human- cities develop. If its urban areas allow people to centric ‘new urbanisation’ in the recently-released breathe, move and work productively, the whole 14th Five-Year Plan is a significant positive step country will benefit from increases in prosperity in continuing its work towards making its cities

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 9 more sustainable. China’s urban vision is clear as the strategy includes compact development, and China can lead on the transition liveable, green, innovative, humane and resilient city towards a zero-carbon economy and concepts. With the right low-carbon and sustainable infrastructure investments and spatial policies in benefit from being at the forefront the implementation plans that follow, China could of the new global growth story. accelerate towards making this vision a reality and put itself in a stronger position to reach its 2060 emissions of greenhouse gases, or carbon neutrality, carbon neutrality goal. If done rapidly, it could and investing heavily in low-carbon infrastructure mean that many of its cities could peak their carbon projects to stimulate economic recovery from the dioxide emissions before 2025, enabling a national COVID-19 pandemic and aid the transition to a peak by 2025. zero-carbon economy. If China accelerates the urban Strategic decisions for how cities handle climate development plans it has outlined in the 14th Five- change adaptation and mitigation during this Year Plan, it has the opportunity to better compete 14th Five-Year Plan period will have a long-lasting in a carbon-constrained world and achieve market impact for decades and centuries to come. As China leadership through its innovations. If it moves prepares for another 200 million of its citizens to too slowly, it may find itself being overtaken by be integrated into urban areas by 2050, the choices competitors, and even confronted with restrictions made today to build clean, compact and connected on its high-carbon exports. cities will have significant implications for its economic, environmental and social future. OUTLINE OF THE REPORT

Accelerating the pace of well-planned and managed The report is divided into three further chapters and cities within this period requires greater economic a conclusion. productivity, resource efficiency, less energy use Chapter 1 examines the economic case for China’s and greater resilience against natural disasters and transition to a sustainable urbanisation model based disease pandemics. Now more than ever, in the on clean, compact and connected cities. The chapter midst of the COVID-19 pandemic, the importance argues that the benefits of healthy and liveable cities of strengthening cities to increase their resilience far exceed the investment costs associated with their is incontrovertible. There is a strong global trend: development. It also explores the potential for China national governments, local policymakers and to secure market leadership in resource-efficient related stakeholders, including urban planners, solutions and innovations central to the future low- developers, architects and community organisations, carbon economy and makes recommendations for are pursuing policies to promote the development unlocking the economic potential of cities. of sustainable cities with better density planning, mixed-use development, public and non-motorised Chapter 2 focuses on specific low-carbon and transport, energy-efficient buildings and accessible sustainable urban investments and supporting green spaces, among many other features. policies. It outlines priority policy actions that the central government can take in the energy, CHINA IN THE GLOBAL CONTEXT buildings, ‘new infrastructure’ and transport sectors. It makes recommendations aimed at developing China can lead on the transition towards a zero- clean, compact and connected cities that would carbon economy and benefit from being at the support an early peak of city carbon emissions. forefront of the new global growth story, where physical and human capital will be increasingly Chapter 3 outlines China’s fiscal challenges. It then complemented by natural and social capital. Its explores strategies to empower municipalities and goals are in line with international aspirations to incentivise the financial sector to meet the estimated achieve the Paris Agreement temperature goal of CNY138 trillion (US$20 trillion) needed to meet holding global warming to well below 2˚C, pursuing China’s Paris Agreement goals, of which a significant efforts for a 1.5˚C maximum increase. Countries portion must come in the form of low-carbon and around the world are setting targets for net-zero sustainable urban infrastructure.

10 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 2. The economic case for China’s sustainable urban transformation

Summary

• Urban infrastructure investments and spatial policies geared towards creating clean, compact and connected (CCC) cities can generate vast economic rewards and bring long-lasting environmental and social benefits.

• Polluted, inefficient and congested cities will not only undermine China’s carbon neutrality goals, but also diminish the country’s economic growth potential and further expose urban areas to the environmental risks of climate change impacts.

• The 14th Five-Year Plan includes a human-centric ‘new urbanisation’ strategy to guide the development of China’s cities. The plan’s focus on low-carbon, sustainable and compact cities is aligned with the CCC cities framework.

• CCC cities have some measurable benefits, such as reduced infrastructure spending, productivity gains from reduced commuting times, and jobs created from low-carbon urban investments.

• Other benefits include increased potential for innovation due to agglomeration effects, and far-reaching economic effects from the improved wellbeing and health of urban residents.

• An urban development model based on CCC cities is also an opportunity for China to secure market competitiveness in resource-efficient solutions and innovations central to the future global low-carbon economy.

• In the shorter term, strategic investments and supportive measures for CCC cities can support many cities to peak their carbon dioxide emissions before 2025. This could enable a national emissions peak by 2025, making attainment of the 2060 carbon neutrality target more realistic.

Recommendations

• Embed the 14th Five-Year Plan’s human-centric ‘new urbanisation strategy,’ which incorporates sustainable urban development, into the centre of forthcoming sectoral and municipal implementation plans.

• Include and prioritise robust indicators within the municipal government performance system that reflect and encourage the 14th Five-Year Plan’s human-centric ‘new urbanisation strategy’.

• Ensure a holistic cost-benefit analysis that is consistent with principles of a human-centric ‘new urbanisation strategy’ is carried out on urban infrastructure projects.

• Improve the international competitiveness of Chinese cities by systematically benchmarking their sustainable urban development progress against global peers.

• Incentivise low-carbon urban development by assigning specific, verifiable emission reduction responsibilities and prioritise city-level carbon inventory systems.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 11 Daytime architectural landscape and skyline in Chongqing, China. Credit: Dongfang Zhao / iStock.

CONTEXT above sea level and 92 per cent of these in urban or peri-urban areas.6 While these at-risk low-elevation Climate change and fossil fuel use threaten coastal zones are a small fraction of the total urban the economic stability of China’s cities land area, they are home to critical infrastructure and high-value real estate.7 China faces significant climate change-related disaster risk, which could eliminate poverty reduction gains and Fossil fuel consumption also causes a threat to prevent further growth. China is regularly among the Chinese cities in a more direct manner: through top three nations most affected by disasters annually air pollution. Despite notable improvements in air in terms of disaster frequency, lives lost and economic quality in many Chinese cities, air pollution in the damage.1 Due to the country’s large size and varying form of ozone and particulate matter (PM) contributes geographies, the impacts of climate change on China an estimated US$40 billion a year in economic are and will continue to be diverse. Global warming of losses through social costs, including early death, 8 more than 1.5°C above pre-industrial levels is expected equivalent to about 0.7 per cent of GDP. At the higher to cause extreme weather events, including strong heat end, some estimates value the health impacts of PM2.5 waves, tropical storms, severe rainfall and droughts exposure alone at 10 per cent of annual GDP.9 in regions across China.2 3 In particular, the country These health costs, however, do not reflect the true has very high exposure to typhoons and flooding, costs that air pollution has on Chinese cities and its including flash, riverine and coastal flooding,4 and the citizens. Air pollution can affect rainfall patterns and United Nations Office for Disaster Risk Reduction has the water cycle, reduce solar energy yields and affect estimated US$18 billion as the average annual loss from plant and food crops from blocked sunlight and floods in recent years.5 Floods cause major damage ozone loss.10 Exemplifying the far-reaching effects of to agriculture and therefore to food security, a major pollution, studies have even linked high levels of air concern of the government (see Box 1, p14). pollution to a reduction in expressed happiness11 and More than 194 million people – over 13 per cent of a significant reduction in intelligence.12 This harms China’s total population and a fifth of the urban the development of human capital, the foundational population – live in coastal zones less than 10 metres driving force for economic growth.

12 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality Replicating the existing sprawled urban form form characteristics and carbon dioxide emission will have severe lock-in effects levels in Chinese cities.20 For example, one study of 104 cities in China found that those with more Rapid urban transformation has been central to centralised and compact urban forms are associated China’s economic success story. At the start of the with lower per-capita emissions.21 Reform and Opening Up period in 1978, just 18 per cent of Chinese people lived in urban areas, and this China’s urban sprawl is particularly unique because has grown to more than 60 per cent today.13 China’s its cities have relatively dense urban centres while urban population of 840 million people is roughly much of the municipality is made up of a fragmented equal to the populations of the United States, EU and patchwork of alternating urban and undeveloped UK combined.14 Nearly a third of the world’s urban pieces of land. Thus, China’s definition of land land expansion between 2000 and 2014 occurred within a city boundary includes both urban and in China, bringing the country’s urbanised area to rural areas. While much attention on Chinese cities around 35,000km2 (greater than the size of Belgium).15 has focused on the central urban core, in which most residents live, much of the economic and China’s dramatic transformation has come at environmental inefficiencies lie in the urban sprawl considerable cost. About 85 per cent of energy- that extends into the periphery. related carbon dioxide emissions are generated This pattern has made it difficult for China’s cities in China’s cities.16 Despite decades of rapid to achieve the full economic benefits that come urbanisation, China remains more than 5 percentage with agglomeration, as well as causing substantial points less urbanised than countries of similar environmental costs. The piecemeal, disjointed income level17 and it is to be expected that the tracts of built-up and rural land22 that make up population living in urban areas will continue Chinese cities result from policies on land ownership, to increase significantly. In the next three to four conversion quotas and the land acquisition process. decades, the urban population is estimated to Chinese cities are thus much less dense than would reach 75–80 per cent of the total population,18 with be expected compared with other developing cities accompanying increases in fossil fuel consumption. around the world: a considerable majority of Chinese How cities are built – their urban form – can have cities have seen their population density decrease strong lock-in effects that can last for decades if not over time, which is the inverse trend compared with centuries. The urban form of cities can significantly the rest of East Asia.23 affect travel behaviour patterns, such as whether If China continues on this urbanisation path to people travel by car or other forms of transport, and accommodate its next 200 million urban residents, land use decisions that can drive substantial energy the lock-in effects from land use decisions and urban use.b 19 Urban form is defined as a city’s physical infrastructure choices could lead to serious economic characteristics, including the density, size and consequences from worsening environmental settlement shape, and its infrastructure, from the and social impacts. Amplified urban sprawl feeds layout of the street and road network, to transport pollution, traffic congestion, social inequities – structures, buildings and their materials and their affecting productivity and innovation – and the loss spatial arrangement and public spaces. of limited prime agricultural land, threatening food China’s model for urban development has been security and reducing resilience to natural disasters often characterised by low density, sprawling urban (see Box 1). Further urban sprawl would lock in even expansion following energy-intensive investments, higher levels of energy consumption for years to which is inefficient. Although the exact proportion come, decreasing the overall liveability of cities. These of carbon dioxide emissions attributed to the urban and other pressures, described by the government as form of China’s cities is not easily calculated, a ‘urban diseases’,c have caused China’s leadership to number of studies show a correlation between urban move towards a new model of urbanisation. b Energy use in cities comes from embodied energy, from manufacturing and distribution of construction materials; operational energy, from heating and cooling and appliances; and fuel for transport, both public and private modes. c The concept of ‘urban diseases’ includes air pollution, traffic congestion, housing and water scarcity among others, and was first given this label by the Chinese government in 2012.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 13 Box 1 China’s food security in the context of climate change

While 20 per cent of the world’s population live in China, it has only 7 per cent of the world’s arable land.24 This relatively low per-capita endowment of arable land – at 0.09 hectares per person, versus 0.47 for the United States, for example – has made ensuring a stable food supply to all Chinese citizens a top-level government priority.25 The government has established a ‘red line’, or strict minimum, for national agricultural land to remain above 1.8 billion mu (120 million hectares).26 Rapid urbanisation in China with its rural-to-urban parcel conversion process continues to encroach on this land, while more food is being consumed by growing urban populations.27 28

Natural disasters also threaten food security:29 floods and droughts over the last four decades caused more than 50 per cent of total grain losses.30 Environmental degradation in terms of soil, water and air pollution also poses major challenges, with toxic organic compounds and heavy metals identified, impacting food safety and security.31 The potential volatility of food prices can have significant impacts on the agricultural sector and especially on the livelihoods of China’s rural and lower-income urban residents. The production of food is likely to face further challenges in the context of climate change, again highlighting the importance of protecting agricultural land from unnecessary urban sprawl.

CLEAN, COMPACT AND CONNECTED CCC cities are aligned with China’s aspirations for CITIES FOR CHINA’S LOW-CARBON AND ‘human-centred’ urban development and support SUSTAINABLE URBANISATION MODEL a transition to low-carbon and sustainable cities, as has been declared by the leadership since the CCC cities are in line with China’s 14th Five- early 2000s, and the focus of numerous central Year Plan’s human-centred ‘new urbanisation government plans and strategies on alleviating its d strategy’ urban stressors. The National New Urbanisation Plan (2014–2020) and the Opinions on Urban The shape and layout of cities greatly affects their Planning and Management (2016) are just two of ability to thrive. The benefits of clean, compact and many national strategies that emphasise urban connected (CCC) cities are significant32 and bring liveability through limiting urban sprawl and a wealth of interconnected economic, social and making the best use of existing land through environmental advantages. sustainable transport, compact road networks and mixed-use development, among other themes Compact, connected and such as balancing development with ecological clean cities bring a wealth of protection and urban-rural integration. The 14th Five-Year Plan has a human-centric ‘new interconnected economic, social urbanisation strategy’ section that calls for the and environmental advantages ‘completion’ of this same new urbanisation concept. It includes qualifying adjectives describing this type and are aligned with China’s of urbanisation, such as liveable, innovative, smart, aspirations for ‘human-centred’ green, low-carbon, humane and resilient, to guide China’s urban growth strategies. Its vision for cities urban development. continues to be clear.

d Throughout the 2000s, President Xi Jinping emphasised ‘people-oriented’ or ‘people-centered’ urban development. Numerous plans and strategies reflect this aspiration, including the National New Urbanisation Plan (2014–2020), the first major national plan promoting sustainable urbanisation. China’s 13th National Five-Year Plan (2016–2020), which dedicated a chapter to people-centered (or ‘new’) urbanisation, set the stage for a series of other national documents, such as the Guidelines for Urban Development and Management (2016) and the Guidelines on Strengthening Environmental Remediation and Urban Rehabilitation of Cities (2017). All of these promote a form of compact, connected and clean development in cities.

14 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality Figure 1 Clean, compact and connected cities

MASS TRANSIT LIVEABLE DENSITY MIXED ACTIVE LAND USE TRANSPORT CONNECTED COMPACT

BETTER FREIGHT ZERO- ADJACENT LOGISTICS DEVELOPMENT CARBON CITIES ELECTRIFICATION MATERIAL EFFICIENCY

CLEAN

ENERGY WASTE EFFICIENCY PREVENTION

DECARBONISATION OF ELECTRICITY

Source: Climate Emergency, Urban Opportunity (Coalition for Urban Transitions, 2019)

Figure 1 summarises some of the characteristics of transport modes, and equitable access to a CCC cities: network of green spaces within neighbourhoods. „ Compact encompasses economic density, with Internet connectivity brings another important a high density of people living and working in type of connectedness as part of an urban a given area; morphological density, making infrastructure service. the most efficient use of available land and „ Clean can include cleaner forms of energy built space to meet people’s needs; and mixed use, transport, low-carbon industries and land use or mixed-use development, locating improved waste management. CCC cities are residential, employment, retail and leisure more liveable with a higher quality of life, 33 opportunities close to one another. achieved through cleaner air, more convenient „ Connected can include ease of travel within and shorter trips through walking, biking and cities to points of interest and amenities via public transport, and a safe and affordable sustainable transport, including non-motorised living environment.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 15 Direct cost savings Estimates show China could save Direct cost savings are the most immediate benefits from infrastructure development associated with up to US$1.4 trillion by pursuing cities that are more compact because less land, more compact, connected materials and energy are needed to connect to people and places when they are closer together.34 urban growth that successfully The investment needs are less for large infrastructure integrates land and transport systems such as transit, telecommunications lines, waste management and water supply and sanitation. development. Further, in less sprawling cities per-capita operating costs of infrastructure and public services are reduced for more users, as are individual energy „ Learning benefits: Close geographical proximity and transport costs. of workers and firms enables more frequent interactions both within and across sectors. This The positive effects of dense urban form in these areas facilitates the spread of existing knowledge, in 35 have been extensively studied, with estimates that particular tacit knowledge that is hard to codify China could save up to US$1.4 trillion by pursuing more in documents or formulas. compact, connected urban growth that successfully integrates land and transport development.36 37 38 A study conducted by the London School of Economics and Political Science showed that in Productivity and innovation Europe a 10 per cent increase in population density is linked to an increase of 1.9 per cent in gross value Urbanisation, productivity growth and innovation added.42 Most studies suggest that productivity 39 are closely related. Beyond the direct cost savings patterns in Asian cities are generally consistent with mentioned above, a well-established body of these agglomeration effects.43 A study of 200 Chinese literature has illustrated the link between compact cities in the 1990s showed that workers’ real incomes and connected cities and economic productivity and and output per worker were higher in bigger cities.44 45 innovation, especially in cities with efficient public Another study, of 120 Chinese cities, showed that a transport networks that enable residents to commute doubling in city size was associated with firm 40 to work and access services easily. productivity increases of 3 to 8 per cent.46

Agglomeration generates economic benefits in three The liveability of cities is also directly tied to a primary ways, as summarised by the Coalition for city’s ability to attract human capital. Liveable 41 Urban Transitions – through sharing, matching and cities are better able to compete in the marketplace learning benefits: for high skilled and high wage workers and „ Sharing benefits: Where many firms seek a businesses from across China and globally, thus common set of inputs, suppliers of those inputs boosting their economic and innovative capacities. are able to specialise and achieve economies of A higher-paying job market can also benefit lower- scale. This in turn means that purchasers benefit skilled workers due to a spillover effect. The from lower costs and/or increased productivity. connection between innovation, talent and liveable urban spaces is a virtuous cycle that has been „ Matching benefits: Larger markets allow firms recognised and used in city branding strategies to find a better fit with their specialised needs, to promote economic development. by employing workers with distinct skills and/ or by linking to suppliers with distinct products. Greater specialisation of both labour and firms enables greater efficiency.

16 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality Box 2 ‘Good density’

Most studies on the benefits of compact cities relate to developed countries. There has been significant debate over whether promoting concentrated urban density makes sense in the developing country context, where many cities are already very densely populated.47 For instance, China’s cities have a much higher population density than US or European cities (with more than three times the average population density in China than in the US and almost twice more than in Europe), and some of the benefits associated with higher density seen in others places, such as decreased commuting times, are not clearly found across Chinese cities in some studies.48 There are, of course, negative effects to being overly dense, such as overcrowding. The goal should be to design areas in a way that attains ‘good density’.49 Rather than further densifying already high-density areas, this means balancing population size and infrastructure development across a city to ensure connectedness between housing and jobs, coordinated with services and amenities, all to promote an improved quality of life.

Although the government has stated in recent years that managing population density and urban sprawl are priorities, remote sensing data show that urban sprawl is continuing to take place across China. In the central and western regions, cities continue to sprawl outwards,50 while in many eastern cities, although the pace of sprawl has decreased, populations have been forced by increased housing prices to move into the city fringes. Thus, China’s cities still have much scope to become more compact.

One approach to compact cities being adopted in China is the concept of ‘15-minute life circles’. Many Chinese cities have embedded this concept into their masterplans, including Shanghai as a frontrunner. It dictates that cities should be redeveloped or built by focusing on providing essential services and public spaces within a 15-minute walking distance. This is similar to initiatives like Paris’s ‘15-minute city’ and other similar schemes in Barcelona, Detroit, London and Portland.

Urban resilience development boundary’ lines.52 This policy, pushed heavily by the central government since 2013 with Constructing CCC cities can strengthen the urban mixed adoption results, was recently reinstated by resilience of cities. Urban resilience is defined by the Ministry of Natural Resources, to be applied to the ability of a city to survive, adapt and grow provinces and cities.e despite the chronic stresses or acute shocks it experiences, such as natural disasters, economic China is also one of the first countries to explicitly 51 crises, public health issues and social unrest. The attempt coordinated, ecosystem-based management context section outlined some broad economic costs across local, regional and national scales. of inaction for mitigating and adapting to various Incorporated into the national Environmental climate shocks. Protection Law in 2015, the Ecological Redline China should improve enforcement of its many Policy demarcates priority land areas with high- policies in line with the CCC cities approach, value ecosystem services and prevents them from resilience and nature-based solutions for climate being built up for urban use. With recent mandates change mitigation and adaptation. One of the for regional and local government collaboration most explicit policy tools to curb urban sprawl to enforce this policy, large areas of land are and preserve natural environments is the use predicted to be protected from urban expansion.53 of development-limiting restrictions or ‘urban This and other policies are due to be updated

e Proposed at the 2013 Central Urbanisation Work Conference by Xi Jinping. There has been a requirement to include ‘Urban construction boundaries’ in city masterplans by the China Town and Country Planning Act since 2006.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 17 under the new, unified national territorial and spatial planning, and could benefit from alignment New analysis for the Coalition with CCC development.f for Urban Transitions suggests a Finally, China’s Sponge City pilot programme of package of technically-feasible dozens of cities, launched in 2013 to support urban water management, is gaining renewed attention low-carbon measures taken today amid fresh concerns about urban resilience and could cut global emissions from due to focus on the United Nations Biodiversity Conference, to be held in China in the spring of certain urban sectors by almost 2021. Stronger enforcement mechanisms for these 90 per cent by 2050. policies and initiatives, and re-examination of other planning guidelines such as land conversion quotas transport and waste by 48 per cent in 2030 compared and floor area ratio regulations for buildings, could with today (1.94 gigatonnes of carbon dioxide accelerate resilience rewards. equivalent [GtCO2-e]) and 89 per cent in 2050 (around 3 GtCO2-e). Together these measures BENEFITS OF LOW-CARBON would bring a net present value of US$7.7 trillion AND SUSTAINABLE URBAN (CNY50 trillion) by 2050, based on energy and INFRASTRUCTURE INVESTMENTS material cost savings alone. Realising this opportunity would require annual investments Return on investment of US$170 billion (CNY1.1 trillion) per year between 2020 and 2050 – equivalent to about 1.3 per cent The returns on low-carbon urban infrastructure of China’s annual GDP55 – but this could generate investments are significant. New analysis for the annual savings worth US$200 billion (CNY1.3 trillion) Coalition for Urban Transitions suggests that a in 2030 and US$610 billion (CNY4 trillion) by 2050. package of technically-feasible low-carbon measures These numbers are likely to be considerably taken today could cut global emissions from certain underestimated as they do not take into account urban sectors by almost 90 per cent by 2050. These potentially higher energy prices, nor faster sectors include green construction and retrofits, technology learning rates. Moreover, while renewable urban energy, active and clean forms commercial loans typically generate returns of of mobility, and material and waste efficiency. The 4.4 per cent in China, these investments would investments required to reduce urban emissions collectively yield 12.1 per cent.56 would be US$1.83 trillion (about 2 per cent of global GDP) per year, but they would generate annual Investment in low-carbon jobs savings worth US$2.80 trillion in 2030 and US$6.98 trillion in 2050. This yields a net present value of A lesson from the 2008 financial crisis is that US$23.9 trillion.54 green stimulus policies often have economic and environmental advantages over a traditional fiscal China could implement a package of low-carbon stimulus.57 Ample research shows that investing measures similar to those proposed to cut global in low-carbon urban infrastructureg can create emissions. Analysis specific to China by the more and higher-paying jobs than investments in Coalition for Urban Transitions indicates that it traditional infrastructure, as illustrated in Figure 2. could produce significant economic returns and For example, renewable energy creates more jobs help reduce urban emissions from urban buildings, than fossil fuel investments by a large margin.

f The new National Territorial and Spatial Plan merged several sectoral plans previously implemented by different ministries to eliminate overlapping mandates and increase efficiency. Part of this is a new governance system that includes planning for urban development boundaries, agricultural redlines, and the ecological redline policy (the ‘three red lines’), productivity-based land supply, carbon and pollutants intensity, constrained land supply, and development intensity. g Low-carbon urban infrastructure in this chapter refers to investments in the buildings, energy, transport, materials and waste sectors.

18 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality Figure 2 Low-carbon sectors out-perform traditional sectors in job creation Create millions of jobs through a green urban recovery Green construction and retrofits Clean mobility Renewable energy

Energy Fossil EV and public Building Renewable Fossil efficiency: fuels: transport: roads: energy: fuels: 8–21 jobs 3 jobs 15–28 jobs 8 jobs 8–28 jobs 3 jobs

Active transport Nature-based solutions Waste and resources

Active Tree planting, Recycling, transport restoration and reuse and infrastructure: management: recovery: 11–27 jobs 40 jobs 3–20 jobs Landfill and Building roads: ‘Grey’ water Incineration: 8 jobs infrasturucture: 0.1 jobs 20 jobs Per 1,000 tonnes of waste Per US$1 million in spending

NB: For Clean R&D, the certainty around the direct job growth potential per US$1 million in spending is insufficient to provide a comparison. For all sources view The Economic Case for Greening the Global Recovery through Cities, Coalition for Urban Transitions, 2020

Source: The Economic Case for Greening the Global Recovery through Cities, presentation, Coalition for Urban Transitions, 14 September 2020

The analysis underpinning the preceding subsection a more compact urban form means fewer car journeys indicates that adopting the same package of are needed and thus reduces fuel consumption, CCC low-carbon measures – cutting emissions from cities can help the Chinese economy decouple from urban buildings, materials, transport and waste – the volatility of the global oil market.61 could support 15.2 million jobs in China in 2030, China is also the world’s largest subsidiser of fossil mostly in energy efficiency in the buildings sector, fuel energy, which is contributing to preventing a and 3.5 million jobs in 2050, mostly in electric faster transition to renewable energy (see Box 3, p20). vehicles. For comparison, in 2017 China’s automotive 58 industry employed about 1.6 million people. INDUSTRY LEADERSHIP POTENTIAL A recent study shows that the job creation rate of renewable energy industries, such as wind power Leadership in low-carbon urban development and solar energy, and of the energy efficiency sector, If China were to make an early entry in emerging is between 1.5 and three times that of traditional low-carbon urban infrastructure and technologies, energy industries in China.59 it could secure the country’s competitiveness in the global low-carbon economy. Research shows Weaning China off fossil fuel dependence that countries that successfully invest early in One of the benefits of transitioning away from a high- technologies and capabilities have better success carbon urban model, especially by promoting low- in diversifying into future products and markets.62 carbon transport and renewable energy, is lowering Cities across the world will increasingly be seeking China’s dependence on imported oil. China is by far to adopt a low-carbon urban development model the world’s largest importer of oil, with more than 10 to meet domestic and international climate change million barrels being imported each day on average.60 and sustainability goals. Chinese companies Dependence on oil puts China’s economy at potential that develop capabilities in the technologies risk from supply disruption and price fluctuations. As and innovations that accompany a low-carbon

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 19 development model domestically will compete China’s accelerated adoption of low-carbon more successfully in global markets. The increasing infrastructure can also have the potential to adoption of connected technologies is driving the support the transition of low-carbon technologies growth of the global smart citiesh market, which is worldwide, not only in the BRI countries. The expected to double in size by 2025, reaching US$820 scale of China’s market and the power of Chinese billion.63 While China has made significant strides in manufacturing can rapidly lower the cost of ‘smart city’ development, South Korea is currently a technologies and products. For example, China’s leading global supplier of ‘smart city’ solutions and entrance into solar panel manufacturing greatly technologies, a position gained in large part due to reduced the cost of the technology and was a its domestic promotion of smart cities over the past critical turning point for solar adoption globally.66 decade (originally termed ‘ubiquitous cities’).64 There is potential for China to make similar contributions in emerging technologies such as The countries in the Belt and Road Initiative (BRI) energy storage and carbon capture. are markets that China can target with its low- carbon infrastructure and technologies, to help As China applies new low-carbon infrastructure those countries build more sustainable cities and and innovations in cities, it can also become avoid the severe economic, environmental and social more attractive to foreign direct investment (FDI), consequences that China experienced due to its which is a priority for the government. Moreover, earlier urbanisation model.65 Exporting low-carbon new talent and companies drawn to China’s new urban technology, goods, talent and services into liveable urban environments will entice other the many BRI countries would unleash long-term companies to set up business in these cities, economic dividends for Chinese companies. Moreover, inducing further FDI and embedding foreign it could lock Chinese standards and technologies into companies and the latest technologies into low-carbon urban infrastructure over the long term. China’s supply chains.

Box 3 Fossil fuel subsidies

Global fossil fuel subsidies play a significant role in keeping energy prices below their true market price, thus slowing the transition towards sustainable energy sources. It is estimated that globally, subsidies remain around US$5 trillion a year.67 China is the world’s largest subsidiser* of fossil fuel energy, contributing around US$1.5 trillion a year.68 If global fossil fuel prices were more in line with their true costs, this would lead to significant economic welfare gains of more than US$1.2 trillion per year through reduced environmental damage, increased fiscal revenues and the adoption of new sustainable technologies.69 More than half of these gains would be felt in emerging and developing economies in Asia, including China.70

*Defined as fuel consumption times the gap between existing and efficient prices (i.e. prices warranted by supply costs, environmental costs, and revenue considerations).

h Smart cities use digital and telecommunication technology to improve the efficiency of services, operations and resources.

20 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality URBANISATION AND further widening the disparities between China’s REGIONAL REBALANCING developed and underdeveloped regions. More than half of China’s potential for emissions abatement in CCC cities in the interior urban areas by 2050 lies in cities that have currently fewer than one million residents,77 so ensuring One of China’s long-term national goals has been to these smaller interior cities are on a low-carbon narrow the gap between the economically advanced development path will be crucial for China to meet and export-oriented coastal megacities and China’s its climate and environmental objectives. less developed interior. In May 2020 the State Council released new guidelines for the long-standing ‘Go CONCLUDING REMARKS AND West’ strategy that reinforce the need to develop RECOMMENDATIONS China’s western regions through the promotion of innovation and modern industries.71 72 While the numbers outlined for investment returns and job creation are compelling, they fail to capture The economic opportunities afforded by China’s the true scope of benefits from investing in clean, first tier coastal cities drive significant internal compact and connected cities. The figures do not yet migration flows away from the interior region. These include the many economic benefits from reduced air migration flows can be considered a type of internal pollution and congestion, the increase in innovation, ‘brain drain’, pulling promising human capital industry leadership and economic activities away from interior cities, and in some ways this stemming from rebalancing and agglomeration in has hindered the local development of knowledge- more CCC cities, or the many intangible attributes based industries and contributed to unbalanced that result from a better standard of living. regional development.73 Further, lower-skilled migrant workers from rural areas in the interior are A myriad of physical and mental wellbeing co- overwhelmingly drawn to the first tier cities, often benefits can be unlocked by CCC cities. The value bypassing opportunities in cities closer to home in from a better quality of life and increased prosperity favour of the coastal cities. The economic and social is often not visible, but is significantly present. costs to China’s interior regions of this migration are For example, the benefits of having access to parks hard to measure but are likely to be significant. and green spaces can have extensive positive effects on emotional wellbeing, from exposure to nature Urbanisation strategy can play a central role in this and engendering a sense of community.78 These rebalancing through the development of smaller, improvements in wellbeing and health reduce the 74 75 well-planned CCC cities in the interior. In burden on health systems and also the number of addition, existing cities in the interior could better working days missed.79 Current economic models retain and draw human capital flows by improving fail to capture both the powerful dynamics and their economic and social offerings.76 However, the very attractive qualities found in less tangible many of these cities still heavily rely on high- forms of capital, such as social capital, natural carbon industries. Though they may not be able to capital and some forms of human capital.80 As a shift their economies from high-carbon industries result, the benefits outlined above likely grossly immediately, taking steps towards a transition is underestimate the full range of economic and social wise. Many other interior cities are at a development benefits of CCC cities. stage where they have the opportunity to leapfrog the previous carbon-intensive city layouts by fully The 14th Five-Year Plan’s human-centric ‘new considering lock-in implications early on and urbanisation strategy’, which covers low-carbon avoiding them. and compact cities, aligns and overlaps with the CCC cities framework described in this chapter. As China’s more developed regions move away from The 14th Five-Year Plan period from 2021 to 2025 high-carbon industries, there is the potential for is a particularly crucial window in which to act. the gap in economic competitiveness with interior The pace and scale of the country’s low-carbon regions to grow even further. If interior cities are urban transformation carry long-term implications locked out of the new low-carbon economy, they may for China and the world’s economic and experience an even more difficult future transition, environmental trajectory.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 21 Recommendations guide the types of urban projects approved and implemented in a city. Since they are tied to „ Embed the 14th Five-Year Plan’s human- government officials’ appraisal and promotion, centric ‘new urbanisation strategy,’ which meeting these targets is of the highest priority. incorporates sustainable urban development, into the centre of forthcoming sectoral and With human-centric ‘new urbanisation’ included municipal implementation plans. in the 14th Five-Year Plan, the government can seize the opportunity to promote a low-carbon There is immense latent economic potential urban transition by thoroughly reforming its in Chinese cities. The 14th Five-Year Plan’s government performance system through more call for more liveable cities through compact robust, practical and comprehensive indicators spatial policies, environmental protection, and to measure the outcome of existing spatial improved transport, promotes key elements of development policies and carbon reduction a sustainable urban development path, and is programmes. China’s many urban development a crucial opportunity to unlock vast economic initiatives are difficult to enforce due to imprecise gains from improved productivity, greater programme definitions, inadequate spatial efficiencies and investments in low-carbon resolution tools, and, most significantly, strong infrastructure. Clean, compact and connected short-term economic and political incentives that cities are also found to be more innovative due to drive decisions by local governments to build agglomeration effects and their ability to attract outward. Consolidating some of the original human capital. These are key to rebalancing voluntary metrics created for these pioneering capital and migrant flows to the interior. The initiatives – such as the Sponge City and Low effects on the wellbeing and health of urban Carbon Eco-cities Pilot Programmes and urban residents stemming from more liveable cities are development boundary and Ecological Redline difficult to capture through economic modelling, Policy spatial policies – and absorbing them into but a reduction in air pollution alone has been the government performance system indicators, shown to create significant economic dividends. could bring accountability to China’s new Instead of keeping the human-centric ‘new urbanisation strategy. urbanisation strategy’ as a separate goal Furthermore, doing so would not only improve within one part of the 14th Five-Year Plan, to be the public sector performance of individual addressed on its own, cities should be positioned municipalities, but would also provide as the central organising unit to address the incentives for local governments to cooperate many long-term structural economic and social and collaborate on regional development goals set across the 14th Five-Year Plan. themes, such as air and water pollution within Accelerating sustainable urban development the environment, transport connectivity and during the 14th Five-Year Plan should mean that public service delivery sectors, and trade. many of China’s cities peak their carbon dioxide „ Ensure a holistic cost-benefit analysis that emissions by 2025, making it possible for a is consistent with principles of the human- national peak by that same year. centric ‘new urbanisation strategy’ is carried „ Include and prioritise robust indicators out on urban infrastructure projects. within the municipal government The economic cost-benefit analysis of urban performance system that reflect and infrastructure projects should be consistent with encourage the 14th Five-Year Plan’s human- low-carbon and sustainable urban development centric ‘new urbanisation strategy’. and should take account of the huge economic China’s system of municipal government impacts of damage caused by air pollution, performance plays a powerful role in how climate change and biodiversity loss. Much of cities are shaped. The indicators and targets in the economic cost-benefit analyses that continue this system act as scorecards to evaluate city to prioritise ‘brown’ infrastructure, including performance, including monitoring the country’s building new coal-fired power plants, would Five-Year Plan implementation, and therefore likely fail a more holistic measure of the true

22 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality economic costs over the long term. Thus ‘brown’ best practices in sustainable urban development investments, while seemingly cost-efficient from global cities across many sectors, in the present, are actually suboptimal and from waste management to energy-efficient expensive over the longer term. A holistic cost- building practices to enforcement measures benefit analysis can boost the real economic of spatial policies. efficiency and minimise locking in infrastructure For Chinese cities to compete globally, they choices that could lead to serious economic could formalise a type of benchmarking consequences from worsening environmental scheme for low-carbon and sustainable urban and social impacts. Additionally, projects should development, systematically comparing consider the full time horizon over which the themselves over time to cities internationally impacts of ‘new infrastructure’ occur. and making improvements. This would avoid Over the long term, a new system to reflect Chinese cities becoming less internationally the costs of such negative externalities on competitive by being locked into a particular the environment would be instrumental urban development path reinforced through for China’s high-quality development. For established but suboptimal domestic practices. example, assessing the worth of natural „ Incentivise low-carbon urban development capital by quantifying its economic value by assigning specific, verifiable emission through the widespread adoption of natural reduction responsibilities and prioritise city- capital accounting is critical. China is making level carbon inventory systems. noteworthy developments to prioritise and recognise natural resources within an expanded Requiring cities to develop specific and verifiable definition of economic value, including piloting emissions reduction roadmaps can incentivise tools and analysis to build calculations to and speed up low-carbon urban development measure Gross Ecosystem Product (GEP), or the in cities and accelerate the economic benefits total economic value of all ecosystem products of an urban transition. Concrete and consistent and services in both monetary and biophysical city-level carbon inventory systems are key value, and has launched efforts to create to ensuring new urban infrastructure is ‘natural resource balance sheets’. The Ministry sustainable. These are necessary in order of Finance and the Ministry of Natural Resources to measure, report and verify inventories to are leading on these natural capital accounting develop specific and distinct emission reduction pilot programme assessments. Scaling up these actions for the diverse development pathways efforts for integrated use countrywide can of China’s cities. At present, the methodology contribute to more holistic cost-benefit analyses. for carbon accounting and inventory is more In the long run this could eventually deter developed at the central and provincial levels high-carbon project investments and encourage and is inconsistent and uncomprehensive at the low-carbon ones. city level, due to city boundary discrepancies, different definitions of economic development „ Improve the international competitiveness levels and non-centralised statistics. of Chinese cities by systematically benchmarking their sustainable urban Some major cities across the country are already development progress against global peers. on the path towards peaking their emissions by 2025. They have developed carbon roadmaps Cities are in competition globally for talent and are implementing low-carbon investment and capital. Resource-efficient and liveable solutions, while other cities, which rely more on cities are best poised to draw the most talented carbon-intensive industries, can aim to peak at a individuals and companies, further sustaining later date. Planning for differentiated timetables economic growth and leadership. A strong for peaking emissions should start now. For all internal system has cities across China cities, having clear city-level carbon inventories competing among themselves on a host of to create specific carbon reduction targets can economic and social development indicators. accelerate their transition to long-term, higher China has actively been learning and applying quality growth.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 23 3. Priority national policy actions to realise China’s sustainable urban transformation

Summary

• Realising China’s urban opportunity will require visionary leadership from the national government.

• Key actions taken in the energy, buildings, ‘new infrastructure’ and transport sectors can unlock economic, environmental and social benefits, and support the majority of cities to peak their carbon dioxide emissions by 2025, accelerating the national peak to that year.

• Practical decarbonisation pathways require coordinated governance in urban areas, tailored to and aligned with local economic development goals.

• The decarbonisation of urban energy systems is a critical step towards reaching China’s climate targets. This requires strictly limiting the building of new coal-fired power plants and promoting the early retirement of existing coal-fired power plants, while concurrently accelerating the development and integration of renewable electric power.

• Energy efficiency in the buildings sector is another key area for decarbonisation. National governments could incentivise local governments to design policies that improve the energy efficiency of buildings and encourage energy saving for the 14th Five-Year Plan period.

• The government’s push for ‘new infrastructure’ (digital, information and innovation infrastructure) presents an opportunity to direct low-carbon investments. Investments can be channelled towards building smart infrastructure that enhances energy efficiency and promoting other low-carbon technologies. This construction should encompass the implementation of ‘smart city’ technologies and the strengthening of urban resilience.

• An integrated avoid–shift–improve approach could support the development of green transport. This includes shifting transport budgets to fund rail networks, green transport and electric vehicle (EV) charging infrastructure; constructing an integrated transport system; and piloting Mobility as a Service (MaaS) within urban agglomerations.

Recommendations

• Strengthen coordinated governance.

• Decarbonise cities’ energy systems through stricter standards on coal-fired power plants and the promotion of renewable energy.

• Enhance energy efficiency in the buildings sector through enforcing green building standards and supporting deep building retrofits.

• Emphasise ‘rational’, smart, low-carbon and resilient development in the construction of ‘new infrastructure’.

• Implement an integrated ‘avoid–shift–improve’ approach to support green transport.

24 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality Urban farm in Central Hong Kong. Rows of green vegetables fill the foreground. A small wind turbine stands in front of the city skyline. Credit: Boogich / iStock.

CONTEXT COORDINATED GOVERNANCE OF THE ENVIRONMENT AND THE ECONOMY AT Targeted action in sectors THE CITY LEVEL The central government has recognised that targeted low-carbon and sustainable infrastructure Integrating economic development and environmental investments in specific sectors are fundamental goals within the development strategies of cities to reach its economic goals and ambitious climate is fundamental to achieving high quality growth targets. China has made significant investments and reaching climate and environmental targets. in the energy, buildings, ‘new infrastructure’ Successful coordinated governance models in China and transport sectors already and can continue could be scaled up across the country through to support key policy actions in these sectors. national government mandates. Shenzhen is an Coordinated governance is also needed in urban example of a city that has successfully integrated areas, tailored to and aligned with local economic its transport and power generation sector goals development goals. Examples of best practice from (see Box 4, p26). At the national level, China’s within China and other countries have shown that institutional reforms of 2018 have incorporated the coordinating governance mechanisms towards functions of responding to climate change into the reaching climate change and environmental goals Ministry of Ecology and Environment (MEE), which can lead to greater mainstream acceptance of may provide institutional support for China to carry sustainable action and increased ambition.81 82 out coordinated governance.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 25 Box 4 Coordinated governance between transport and power generation in Shenzhen to reduce emissions and enhance development

The coordinated governance practices of Shenzhen can provide important lessons for other Chinese cities hoping to achieve an early peak in emissions. Shenzhen is one of China’s four first-tier cities. It has a high population density and strong economic growth. Over the past decade, the city has implemented a quality-oriented, innovation-driven, green development strategy that emphasises the coordinated governance of climate change, air pollution and industrial upgrading.83

Shenzhen first identified the transport and power generation sectors as the two major contributors of both

carbon dioxide and fine particulate matter (PM2.5) emissions. The city then implemented policies to reduce these emissions, aimed at both sectors. In August 2013 the city announced a plan to end coal-fired power generation. Today, only one coal-fired power plant remains in Shenzhen, and the amount of power it generates is declining rapidly. Coal-fired power has been replaced with power generated from natural gas and renewable sources, which now make up nearly 90 per cent of the city’s total power generation capacity.

Shenzhen has actively promoted the use of ‘new energy vehicles’, or electric vehicles, public transport, and bus rapid transit. Shenzhen is the first city in the world to achieve 100 per cent electrification of its buses, boasting 16,359 electric buses, 510 bus charging stations, and 5,000 charging points in operation in 2017.84 And in 2019 Shenzhen achieved 100 per cent electrification of the city’s taxis.

From 2010 to 2017, Shenzhen’s carbon emissions per CNY10,000 (US$1,316) of GDP decreased by 26.3 per cent.

Meanwhile, the city’s air quality has improved significantly. Its annual average PM2.5 concentration had declined to 26 grams per cubic metre (g/m3) in 2018 from 33 g/m3 in 2014, exceeding the national standard (35g/m3), and achieving a good quality of air on 94.5 per cent of days.85

Implementing interregional coordinated Given the differences in development between governance regions and urban–rural imbalances resulting from China’s rapid urbanisation,88 89 equity and Urban agglomerations should be the focus of the inclusion should be consciously incorporated next stage of high-quality, balanced and socially into low-carbon and resilient urban transition inclusive economic growth.A coordinated regional pathways. Guided by the target for peaking carbon approach for the success of urban agglomerations is emissions, the national government could key. Examples of successful urban agglomerations develop a differentiated timetable for cities to in China include Beijing-Tianjin-Hebei (Jing-Jin-Ji), peak, according to each city’s local conditions. the Yangtze River Delta and the Pearl River Delta. A number of cities have committed to peaking These three agglomerations collectively contribute emissions by a certain year through pilot 40 per cent of China’s national GDP.86 They were programmes. The national government could now first created by developing urban agglomeration delineate a timeline for cities not included in the authorities and metropolitan development laws pilots, requiring that regions with high levels of that required the integration of regional plans. It is economic development take the lead in achieving important to replicate this model across the country peak emissions.90 91 92 Cities in the most developed by determining regions’ competitive advantages, regions could also be encouraged to pioneer green focusing on their spatial planning and efficiency of development and adopt urban carbon-neutrality urban land use, and integrating the concept of clean, roadmaps during the 14th Five-Year Plan period compact and connected into urban areas to increase of 2021–2025. efficiency and resilience.87

26 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality DECARBONISING CITIES’ ENERGY The decarbonisation of China’s energy systems SYSTEMS also relies on the development of non-fossil power generation, especially intermittent renewable Approximately 85 per cent of China’s carbon dioxide energy. However, the lack of power grid capabilities emissions are related to urban energy consumption, to deal with volatility and seasonal imbalances a rate that is much higher than in Europe (where it is in power currently presents a major challenge. 69 per cent on average) and somewhat higher than A number of critical actions are now needed: 93 the United States (80 per cent). The main reason for investment in research and development of a system this difference lies in urban China’s reliance on fossil for optimal allocation of intermittent renewable fuels. Currently, coal still accounts for 38.5 per cent energy resources, starting with the integration of of urban energy sources on average, which is much smart power grids, and establishment of a strong higher than in leading cities around the world such ultra-high voltage (UHV) power network as the as Tokyo (12 per cent), Paris, London and Singapore backbone network in China. These efforts would 94 (all around 1 per cent). Decarbonising electricity comprehensively improve China’s ability to enhance by shifting to renewable energy would deliver 44 per the transmission capacity of power grids to ensure cent of China’s urban emissions abatement potential. safe operations, meet needs for large-scale access, Therefore, early peaking of urban carbon emissions transmission and consumption of clean renewable calls for the decarbonisation of energy plants in energy, and enable cities to pursue more power from cities. This, in turn, requires strict limitations on water, wind, solar and electricity. Reforming the the building of new coal-fired power plants and electric power market could improve the efficiency of promoting the early retirement of existing plants, energy production and utilisation, establish a clear while concurrently accelerating the development and reasonable transmission and distribution price and integration of renewable electric power. system, and ultimately better guide power planning as a whole. Tightening standards for coal-fired power plants and promoting renewable energy Optimising urban energy planning and China remains a major investor in coal power, with promoting low-carbon urban energy the total installed capacity of coal reaching 1,080 consumption gigawatts (GW) by the end of 2020.95 Despite plans Low-carbon energy development plans within the to reduce the number of coal-fired power plants, the 14th Five-Year Plan period that emphasise clean national government continues to authorise new energy sources while taking into account the use of power plants – in early 2020, for example, China put coal, oil and natural gas are key to optimising urban 38.4 GW of new plants into operation.96 It is imperative energy planning. This type of carefully planned that a robust plan and timetable to phase out coal97 multiple-energy-source planning could set an is established and that standards for existing coal- ambitious pathway to decarbonisation and peaking fired power plants are tightened. These actions emissions. While this planning can be mandated would support some cities to decrease their coal-fired by the national government, local governments electricity consumption and increase renewable could balance the supply and consumption electricity to achieve carbon emissions abatement sides within urban low-carbon energy planning. targets during the 14th Five-Year Plan period. Given the relatively higher price of renewable Going further, the national government should call electricity compared with fossil fuels in China, for the most polluting coal-fired power plants to be communications and outreach to city residents retired, and the ban on additional coal generation to raise awareness of the benefits of a sustainable capacity should be reimposed as soon as possible. transition and encourage behaviour change could The original ban was lifted in 2018, resulting in the be beneficial. Local governments could support justification and construction of additional coal- targeted education and services on green energy fired power generating units. Policies to curb these efficiency in communities, promote energy-saving existing plants are needed urgently. Moreover, the and low-carbon equipment and facilities, and function of coal-fired power should transform from actively encourage community residents to pursue baseload to peak load, particularly after 2030. low-carbon lifestyles and behaviours.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 27 ENERGY EFFICIENCY IN THE BUILDINGS for public buildings. Integrating more technology SECTOR – GREEN BUILDING STANDARDS and innovation into building and district energy AND DEEP RETROFITS systems is also important. Attention should be paid to both system efficiency and the use of renewable Only green and efficient urban buildings can energy, particularly for cooling, heating and power guarantee the development of a low-carbon urban supply to public buildings. Pilot projects could then transition. National governments could incentivise be scaled up to normalise industry practices and local governments to design diverse policies that standards for different categories of buildings, such improve the energy efficiency of buildings and as ultra-low, near-zero, zero-energy, and energy- encourage energy saving in urban buildings during plus buildings.j Additionally, cities could encourage the 14th Five-Year Plan period. Renovating older inclusion of distributed photovoltaic power residential areas could be an initial priority. generation on rooftops through the use of policy subsidies or green finance. Requiring public buildings to peak Cities could also incorporate smart energy emissions first consumption management systems. These systems Public buildings consume the most energy within would provide a clear view of energy consumption in the buildings sector and should therefore be the public buildings and ultimately show the benefits of focal point for future emissions reductions in cities. the initiatives recommended above. These systems Overall, the buildings sectori accounted for 20 per would encourage data-driven policymaking and cent of China’s total primary energy consumption and help to ensure an effective pathway towards peaking 25 per cent of greenhouse gas emissions in 2016.98 carbon emissions. Improving the efficiency of heating, cooling and lighting would make buildings more comfortable, Supporting deep building retrofits for urban cut energy bills, and deliver up to 15 per cent of residential buildings China’s urban abatement potential.99 It is critical to Residential buildings should be another focus. improve the energy efficiency of public buildings, To support deep retrofits of residential buildings, and promote energy conservation and emissions 100 it is essential to popularise the use of energy-saving reduction, through innovative technologies. equipment, strengthen education around During the 14th Five-Year Plan period, the national energy conservation and emissions reduction, government could focus support on the scaling up and renovate old urban residential building of pilot projects to advance the energy efficiency of communities. Older residential buildings could public buildings. These could include combined heat be prioritised for renovation because this is where and power systems and distributed energy systems, the most upgrading is needed. In July 2020 the among others. Chinese national government put forward a policy Cities could start by strictly enforcing green plan that increased financial support for the building standards, requiring all new buildings to comprehensive renovation of residential buildings meet the Assessment Standard for Green Building built before 2001.101 Local governments could take (standard GB/T 50378-2019). Cities could also the opportunity to mobilise private capital, play an active role in promoting the application advocating the widespread use of energy-saving of energy management contracts (EMCs) in large technologies and equipment and encouraging public buildings, thereby unlocking the market buy-in through bond issuance and green finance, potential of energy efficiency upgrade programmes among other options.

i Energy consumption refers to commercial energy use during the building operations stage; it excludes biomass and biogas energy consumption. j An ultra-low energy building is a house built using low energy methods, and allows a very low and very efficient use of energy. Several types of ultra-low energy houses exist. The aim of near-zero-energy buildings is to consume very little energy. The small residual demand is largely met by renewable energy generated onsite or nearby. A zero-energy building produces enough renewable energy to meet its own annual energy consumption requirements, thereby reducing the use of non-renewable energy in the building sector. Energy-plus building generally means a building with an energy performance that is so good that the energy generated by the building is higher than the energy used by the building.

28 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality Another significant step that local governments services, from energy grids to transport systems, could take would be to tighten environmental parking, water treatment, waste management, standards for energy-saving materials and require and more.105 106 Smart cities represent a new way of their installation in renovation projects. For thinking about urban space and future development instance, cities could implement a variety of low- goals and serve as models for the integration of carbon and energy-saving pilot projects to encourage green energy systems, energy efficiency, sustainable the uptake of photovoltaic and sporadic wind power mobility, environmental protection and economic in building projects. This could be complemented sustainability.107 The core foundation of the cities will by targeted public education campaigns to explain be advanced technology, and specifically the Internet the importance of energy conservation and of of Things (IoT): storing and distributing cloud-based renewable energy. data to improve energy and operational efficiencies, and as a result air quality, traffic controls, health LOW-CARBON, SUSTAINABLE AND care and more. RESILIENT DEVELOPMENT IN NEW The following are some of the considerations that INFRASTRUCTURE CONSTRUCTION should be taken at the different stages of developing smart cities: As part of the COVID-19 recovery plans, the national government launched a stimulus package targeted 1. Planning stage: Information asymmetry and at building digital, information and innovation redundancy among city-level governments in China infrastructure, or so-called ‘new infrastructure’. present serious challenges for the design and This differs from traditional infrastructure in its planning of smart cities.108 The national government emphasis on new technologies, including 5G base could take the lead to formulate operation rules, stations and big data centres, high-speed railways, evaluation systems and standards for smart cities. urban rail systems and new energy vehicle charging points, for example. The construction of ‘new 2. Operation stage: This stage should make use infrastructure’ would facilitate digital transformation of big data platforms in smart cities to strengthen 109 across industries and sectors.102 the construction of digitised public assets. Smart elements, such as smart parking lots/carparks, smart ‘New infrastructure’ should be low-carbon, including manhole covers and smart buildings can also be smart infrastructure developed as part of clean, connected by IoT techniques to support the efficient compact and connected cities. These investments operation of cities and their capabilities to respond would enhance energy efficiency and promote the to emergencies. development of other low-carbon technologies and innovative business models.103 Channelling these 3. Construction stage: Attracting private-sector ‘new infrastructure’ investments in this way would investment should be a part of constructing and support a move to a low-carbon economy and could implementing smart technologies. ‘Smart city’ make China more competitive in the international development should promote the intelligent, digital marketplace. It would also create sustainable and upgrading of traditional infrastructure, including inclusive economic, health and environmental transport, energy, water conservancy and municipal benefits, and demonstrate climate ambition and administration infrastructure. leadership internationally. Accelerating urban resilience The focus of building ‘new infrastructure’ should fall on the two important areas of implementing ‘smart city’ The development of urban resilience and the technologies and strengthening urban resilience. construction of resilient cities in China have developed rapidly in recent years. While resilient Implementing smart city development cities are often primarily focused on geological, climate and other disaster responses, they should be The national government has been promoting smart viewed through a wider environmental, economic cities as a way to address climate and environmental and societal lens with goals for disaster prevention.110 concerns.104 The term ‘smart city’ refers to the use Resilient cities are those that are able to bounce of technology to improve urban infrastructure and back from and protect against future economic,

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 29 environmental, social and institutional shocks. They 3. Development stage: Beyond the city, resilience foster sustainable, inclusive development and social planning can then be applied to broader regional wellbeing for residents.111 112 crisis response strategies and in urban agglomerations. First, it is necessary to construct regional linkage Beijing was the first city in China to incorporate mechanisms and develop regional resilient-city the construction of resilient cities into its urban networks: emergency response protocols could be planning.113 Since then, Yiwu in Zhejiang, Deyang in strengthened by linking cities together to ensure Sichuan, Haiyan in Zhejiang, and Huangshi in Hubei that emergency supplies and services can be have formulated and implemented resilience plans shared; and cities could share regional digital and have been included in the global ‘100 Resilient infrastructure. At the national level, the government Cities’ (an initiative of the Rockefeller Foundation).114 should carry out security risk assessments of The following are some of the considerations urban agglomerations, jointly build a unified that should be taken in the different stages of and comprehensive information platform for accelerating urban resilience: regional disaster prevention and risk prediction management, and establish regional risk monitoring 1. Pilot and planning stage: Consistent definitions and early warning systems. and parameters for the construction of resilient cities should be established first. The parameters AN INTEGRATED ‘AVOID–SHIFT–IMPROVE’ should be applied to building resilience into GREEN TRANSPORT STRATEGY industry, infrastructure, public services and social governance within cities. Resilience planning should Avoid–shift–improve (ASI)116 is a comprehensive address inefficiencies within the urban system approach that aims to promote alternative mobility and develop mechanisms to promote coordinated solutions and develop sustainable transport operation across sectors. For example, resilient city systems. It does this through reducing travel planning should establish an efficient coordination demand and improving logistics (avoid), shifting mechanism among diverse local industries and away from motorised forms of mobility (shift), and incorporate disaster prevention and related increasing vehicle efficiency, electrification and infrastructure construction into overall spatial use of low-carbon fuels (improve). This integrated planning. In terms of public services, aside from strategy has the potential to alleviate traffic ensuring basic healthcare, medical capacity should congestion and reduce transport emissions, and be improved to respond to emergencies. could deliver about 10 per cent of China’s urban emissions abatement potential.117 2. Assessment stage: The ‘urban risk physical examination’ pilot programme should be To date, the ASI strategy has been successfully expanded and conducted as a routine assessment implemented by a number of local governments in for evaluating urban resilience. In June 2020 the China, such as Beijing. The national government Ministry of Housing and Urban-Rural Development could now implement a comprehensive, integrated issued the Work Plan for Urban Physical ASI solution. This would first entail feasibility Examination. Thirty-six Chinese cities had carried studies across many policies, addressing the out these assessments of risk and resilience by the implementation arrangements and coordination end of the year.115 Moving forward into the 14th of existing measures. A monitoring and evaluation Five-Year Plan period, this pilot programme should mechanism to ensure that transport planning is be broadened to include the active use of big data coordinated with land use plans and that policy technology, such as ‘smart city’ development measures can be adjusted and upgraded regularly and the construction of ‘new infrastructure’, and is key. Local governments should be required to comprehensive risk assessments. The Ministry follow the same procedure to monitor and evaluate of Housing and Urban-Rural Development could their own plans and policies. Finally, national urban also establish and lead platforms to house the transport policies should integrate green transport information obtained by these urban physical as a priority, which would send a clear signal to local examinations, including detailed resilience governments and incentivise them to increase the indicators that meet municipal needs and capacities. attention they give to green transport.

30 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality Below we describe actions that are part of integrated Constructing an integrated transport system ASI strategies: shifting transport budgets to fund and piloting Mobility as a Service (MaaS) rail networks, green transport and electric vehicle charging infrastructure, constructing an integrated The need for more connected intercity travel is transport system, and piloting Mobility as a Service. growing, which calls for intensive, diversified and efficient modes of transport.121 To promote Shifting transport budgets sustainable intercity travel within urban agglomerations, the national government should Rail infrastructure occupies less land, consumes take the lead on improving specific aspects of the less energy and emits fewer emissions than road transport network. These include building intercity infrastructure and transport. The World Resources railways and integrating rail transit networks at Institute estimates that transferring freight to rail different levels, improving intercity shared mobility or waterways will result in the reduction of 432 and public transport systems to provide seamless million tons of carbon dioxide emissions by 2050 connectivity for green transport, and integrating compared with a business-as-usual scenario.118 regional transport payment systems. The national government could allocate a larger budget to inter- and intra-city rail networks, and Capitalising on these efforts, the government could require local governments to shift road budgets build a travel planning information service platform towards supporting public transport and walking and pilot Mobility as a Service (MaaS) – an on-demand and cycling infrastructure. This is particularly mobility service that integrates transport services, important for urban agglomerations and those local real-time transport information, payment and government areas that are undergoing rapid urban ticketing into a single digital platform – in order development. To accelerate vehicle electrification, to meet personalised mobility needs. Residents of EV charging infrastructure can also be included in the urban agglomeration would thus be provided the priorities of transport budgets. with a door-to-door travel service from departure to destination, which would encourage them to use To further speed the shift of freight transport from only public transport for intercity travel. Given the road to rail, other supporting measures include imbalance in regional development, MaaS should improving rail and waterway capacities and quality be piloted first in China’s most developed urban of services, and encouraging multimodal transport agglomerations – the Yangtze River Delta, Beijing- and the application of big data to freight logistics Tianjin-Hebei, and the Greater Bay Area – and then management. scaled up to other regions. The introduction of road pricing is another option, for example through congestion charges, toxicity charges or parking pricing. This is in line with the principles of the ‘user pays’ and the ‘polluter pays’. A level of road pricing is needed that would internalise the environmental costs of driving, reduce the demand for car travel, and incentivise a shift to green transport and new mobility services. Road pricing is especially promising because it can raise significant funds for public budgets, which then serve as own-source revenues for local governments, potentially funding green transport infrastructure projects, without negative economic impacts.119 Implementation of road pricing requires national legislation, regulation, and policies to An Avoid-Shift-Improve strategy 120 provide legal safeguards. could deliver about 10 per cent of China’s urban emissions abatement potential.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 31 SUMMARY OF RECOMMENDATIONS governments to design a range of policies that improve the energy efficiency of buildings and „ Strengthen coordinated governance. encourage energy saving in urban buildings Practical decarbonisation pathways require during the 14th Five-Year Plan period. The coordinated governance in urban areas, tailored to initial focus could be on the renovation of older and aligned with local economic development goals. residential buildings. A coordinated regional approach would maximise benefits. Establishing urban agglomeration „ Emphasise ‘rational’, smart, low-carbon and authorities and metropolitan development laws resilient development in the construction of could support the integration of regional plans. ‘new infrastructure’. The national mandate for the construction of „ Decarbonise cities’ energy systems through digital, information and innovation – or ‘new’ – stricter standards for coal-fired power plants infrastructure presents an opportunity to develop and promoting renewable energy. Decarbonisation of urban energy systems low-carbon infrastructure. The associated is a critical step towards reaching China’s urbanisation processes should include the climate targets. The national government could implementation of smart city technology and the encourage cities to develop comprehensive strengthening of urban resilience. low-carbon energy development plans within „ Implement an integrated ‘avoid–shift–improve’ the period of the 14th Five-Year Plan. These approach to support green transport. plans could place an emphasis on clean energy The national government could implement an sources while taking into account the use of integrated avoid–shift–improve (ASI) solution to coal, oil and natural gas. Multi-energy source develop green, or sustainable, transport systems. planning thus could set an ambitious pathway to Specific actions within integrated ASI strategies decarbonisation and peaking emissions. include shifting transport budgets to fund rail „ Enhance energy efficiency in the buildings networks, green transport and electric vehicle sector through enforcing green building (EV) charging infrastructures; constructing an standards and supporting deep retrofits. integrated transport system; and piloting Mobility The national government could incentivise local as a Service (MaaS) within urban agglomerations.

Figure 3 The avoid-shift-improve (ASI) approach

No travel activity Active transport Public Individual No desire or need to travel Walking, cycling motorised transport motorised transport Public transport (bus, rail) Car, taxi, motorcycle

Avoid Shift Improve or reduce travel to more energy efficiency through or the need to travel effecient modes vehicle technology

Source: Sustainable Urban Transport: Avoid-Shift-Improve (A-S-I) (Transformative Urban Mobility Initiative, 2019).

32 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 4. Financing China’s sustainable urban transformation

Summary

• To meet its climate goals under the Paris Agreement, China needs to spend an estimated US$20 trillion over the next three decades across all sectors. As cities are the primary source of China’s carbon emissions, much of this investment needs to take the form of low-carbon and sustainable urban infrastructure.

• Decades of rapid infrastructure growth, initially funded through the sale of land use rights and off-budget investment vehicles, have left many municipalities in deep debt, prompting concerns over meeting the financing needs of a low-carbon and sustainable transition. A multi-layered fiscal strategy is needed that empowers municipalities with sufficient financial resources and incentivises low-carbon urban investments over the long term.

• An important step is to empower Chinese cities themselves with the fiscal stability they require. Several well-designed local taxes have been identified that can provide cities with additional own-source revenues. These include a beneficiary property tax, a ‘piggyback’ tax on the personal income tax and a national carbon tax with a ‘piggyback’ tax.

• Chinese cities can also be empowered to make low-carbon and sustainable investments through more efficient data sharing and coordination; by using special purpose bonds; and expanding issuing requirements to include minimum environmental thresholds for certain projects.

• The financial system needs to be incentivised to prioritise low-carbon and sustainable urban investments. An estimated more than 85 per cent of the total funding needed for the low-carbon infrastructure to meet carbon neutrality goals needs to come from outside of government budgets.

• The vast majority of banks and other financial institutions still lack the information and knowledge of climate risks to be able to grasp fully the latent market potential of green finance. Considering ways to incrementally change the valuation of projects and project time horizons would effectively increase the cost of financing for high-carbon projects as well as reduce the relative costs for sustainable projects.

Recommendations

• Develop stable own-source revenue streams at the municipal level.

• Prioritise strengthening systems for data collection and data sharing.

• Include minimum environmental thresholds for projects funded by special purpose bonds.

• Scale up environmental information disclosure.

• Develop a clear taxonomy system for green bonds that defines the difference between sustainable and ‘brown’ projects or infrastructure.

• Incorporate more sophisticated environmental risk and pricing mechanisms for Chinese banks.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 33 River with waterside deck and greening bank in Ningbo city. Credit: syrnx / Shutterstock.

CONTEXT and wellbeing of residents by reducing pollution, congestion and inefficiencies. China’s fiscal challenges However, there is a gap between the country’s The low-carbon and sustainable transformation ambitious high-level objectives and the financing of China’s urban areas is crucial to global efforts choices and priorities of municipal governments. to limit global warming to well below 2˚C, while The successful translation of these national goals making efforts to limit the increase to 1.5˚C, as set into local policies is critical, as the majority of the out in the Paris Agreement. To meet this challenge decisions that establish the form of urban areas are China will need to invest US$20 trillion over the next determined at these levels.125 Meanwhile, Chinese three decades, across all sectors.122 In an ambitious cities are undergoing extensive fiscal reforms. move, in autumn 2020 China announced it would Decades of rapid infrastructure growth, initially reach carbon neutrality by 2060 and peak its carbon funded through the sale of land use rights and then dioxide emissions “before 2030”. through off-budget local government financing vehicles, have left many municipalities in deep debt. Low-carbon infrastructure investments in cities Subsequent restrictions have led to a decline in local are crucial since cities are the primary source of government revenue, leaving even less capacity and China’s carbon emissions. The country currently incentive for investing in new forms of low-carbon has more than 110 cities with a population of one infrastructure. China must now strike a balance 123 million and above and these cities are growing between the mounting fiscal pressures to deliver steadily. Estimates indicate that almost half of the with lower fiscal resources126 and the increasing need world’s expected construction in this decade will to finance low-carbon urban infrastructure. occur in China.124 The specific low-carbon measures in energy, buildings, ‘new infrastructure’ and MUNICIPAL FINANCES transport described in Chapter 2 can place cities on a low-carbon development path. As described in While the central government sets the general Chapter 1, the development of clean compact and direction of China’s economy, local governments connected (CCC) cities can increase the prosperity play the dominant role in shaping the practical

34 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality decisions that shape a city, including the The Ministry of Finance at this time also clarified development and financing of infrastructure that LGFV debts would no longer be treated like projects. Currently, municipal governments are government debt, and hence would be allowed to responsible for the majority of China’s urban fail, like any other debt. While ‘closing the back infrastructure development.127 Decentralisation door’, the Ministry of Finance also ‘opened the front has been a defining feature of China’s fiscal system door’ by allowing for the issuance of new ‘special since the beginning of the Reform and Opening Up purpose’ bonds. These bonds are project-based era, when control over the allocation of resources, and can be repaid by revenues generated by the planning and budgetary powers was transferred projects, allowing for new types of official debt to to cities.128 This decentralised fiscal model has replace LGFVs as the main mechanism for financing impressively met the demands created by rapid infrastructure investments. urban growth over the past four decades. However, it has also led to creative off-budget financing models Although special purpose bonds are a close and large amounts of debt. replacement for the kind of off-budget infrastructure funding local governments used before 2015, China’s transition to a market economy through the these reforms have led to greater supervision and mid-1990s presented many challenges, which put smaller overall budgets. The result has been an extraordinary pressure on municipal budgets as the ongoing reliance on LGFVs. Total off-budget debt momentum of rural-to-urban migration ramped up. held by LGFVs had grown to more than CNY10 Formal local government budgets depend mostly on trillion (US$1.5 trillion) as of July 2020,133 back to revenue-sharing and central government transfers, levels similar before the debt swap programme. but because these often have not equalled the Thus, there are many unresolved questions amounts required to fulfil mandates for developing over the long-term pattern of local government and funding urban infrastructure and services, cities financing, financial risk and the viability of planned have found other ways to cope. infrastructure projects and as a consequence many As described above, cities turned to revenues from creditors are becoming increasingly wary of lending 134 land-use sales as a significant form of financing. to local governments. Additionally, local governments generated debt through off-budget local government financing Stabilising municipal financing through vehicles (LGFVs). The LGFVs were created as own-source revenues separate legal entities to carry out public goods China’s indirect urban financing model destabilises functions and finance profit-making activities long-term decision-making and complicates efforts through bank loans, project bonds and creating to promote sustainable infrastructure development. public–private partnerships.129 Under this The interplay between investment corporations, framework, the LGFVs are technically the debtors banks and municipal governments often incentivises but in reality debt liabilities remain implicitly short-term profit-seeking behaviour. Land transfers underwritten by municipal governments. as a means of fundraising often take the form of These complex LGFVs became extensively used across high-return real estate projects that are usually far the country because they facilitated the enormous from sustainable and often consist of an unnecessary amounts of capital needed to fund China’s urban expansion of urban sprawl.135 development.130 In addition to funding infrastructure, One of the most destabilising factors for LGFVs are often involved in other profitable sectors, municipalities is the lack of own-source revenues. mainly real estate and financial services.131 This has been extensively explored by Ahmad and In 2015, in response to concerns over vast local Colenbrander (2020), who conclude that having government debt and other ills created by off- access to their own revenues would improve cities’ budget financing, China’s central government accountability for service delivery, would “protect moved to transfer more than CNY15 trillion of local their budgets from the effects of national tax cuts”, government debt, including from LGFVs, onto the and would also “create incentives for prudent fiscal official ledger through a debt swap programme, management by enabling sustainable access to replacing implicit debts with government bonds.132 private finance”.136 In addition to the challenges

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 35 created by the gap in funding from government fiscal help ensure more predictable local budgets. transfers, shared revenues often fluctuate in response It can also expand the tax base by encouraging to the changing priorities of the central government, local governments to generate information on making it difficult to anchor a system of local assets, profits and rents.140 Currently personal government bonds or the management of liabilities.137 income tax in China is much lower than in Own-source revenue allows cities to provide financial many developed countries.141 As income levels sustainability and create the appropriate incentive rise, personal income tax has the potential structures for infrastructure projects.138 to be an increasingly significant source of revenue generation. Below is a list of some suggested local taxes:k „ A local carbon ‘piggyback’ tax. China’s „ Beneficial property tax. A recurrent property national carbon emissions trading system was tax would generate revenue and alleviate local launched on 1 February 2021 and is a milestone governments’ reliance on land transfers and off- in climate policy and mitigation efforts. The budget debt. Beneficial property taxes are based country has been experimenting with various on occupancy depending on size and location, options for about a decade with carbon market and simple criteria such as local infrastructure pilot provinces and cities.l Beginning with the and services. They avoid the complexities of energy sector, the national carbon emissions property valuations found in traditional property scheme has the potential to be the largest tax schemes. emissions trading system in the world.m A local Based on an analysis of revenues and income surcharge could then be levied on top of this distribution across six provincial capitals, carbon price and perhaps applied to sectors Ahmad et al. (2020) propose raising 2 per cent outside the power sector, such as transport.142 of city-level GDP by applying a relatively modest This could allow cities to accelerate the occupancy tax based on property size and reduction in demand for polluting activities location. This proposal links the property tax and encourage a more rapid shift towards with city-level GDP so that richer municipalities cleaner technologies and solutions. Cities could pay higher rates than poorer cities. This cooperate by setting the same carbon tax level variation in rates between cities can encourage to avoid the relocation of businesses due to more efficient land use and promote greater concerns about the impact on competitiveness. investment in lower-income cities.139 Although The combined carbon price provided by the property taxes have been considered without emissions trading system and city-level carbon action being taken for over a decade by the tax would provide a powerful market signal that Chinese authorities, they are being discussed would redirect public and private financial flows anew in light of the current fiscal challenges and investments away from high-carbon faced by municipalities. activities towards low-carbon alternatives. „ A ‘piggyback’ on the personal income tax. In addition to the supplementary city-level carbon Among the most straightforward ways of tax, localities could devise other Pigouvian taxesn strengthening own-source revenues for cities to aggressively tackle other issues such as traffic is a supplementary ‘piggyback’ tax on the congestion, air pollution, greenhouse gases, and national personal income tax. Allowing other undesirable ‘urban diseases’, as the Chinese municipalities to place a local tax surcharge can government has labelled them. One such tax, k The following draws from and summarises previous research from E. Ahmad and S. Colenbrander, Financing a Sustainable and Inclusive Urban Transition in China, https://urbantransitions.global/wp-content/uploads/2020/03/Financing_a_Sustainable_and_Inclusive_Urban_Transition_ in_China_web_FINAL.pdf l These pilots have taken place in Hubei Province, Guangdong Province, Shenzhen, Beijing, Tianjin, Shanghai and Chongqing, and two registered exchanges in Fujian Province and Sichuan Province. m To meet the carbon emissions peak before 2030 and carbon neutrality goal, the Ministry of Ecology and the Environment announced plans to extend the system to other industry sectors and civil aviation. n Pigouvian taxes are taxes on market activities that create adverse effects for society, such as taxes on plastic bags, gas or cigarettes.

36 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality already in place, is the Environmental Protection planning and decision-making among cities. This Tax, which was introduced in 2018 to penalise and other pilot platforms could eventually inform companies for exceeding permitted amounts of solid a bigger, more ambitious and inclusive system waste, air, noise and water pollution. This tax across government agencies that would enable the replaced local pollutant discharge fees, of which monitoring of performance and progress of low- the central government took 10 per cent. Under this carbon investments, which can ultimately inform tax, all fees from pollution that take place within a and attract financing. municipality go to the city government. While this tax sets an important framework, it has been Greening special purpose bonds recognised that it has had a limited effect and a more ambitious set of Pigouvian taxes are needed.143 As mentioned above, special purpose bonds If other Pigouvian taxes are imposed, collectively allocated by the central government are designed these revenues could be even more impactful if they to transition away from local government financing are explicitly earmarked to further support vehicles as the primary investment tool for local sustainable investments. governments. Their use has been further expanded in response to the COVID-19 pandemic. In 2020, Data sharing CNY3.75 (US$580 billion) of these bonds were issued, up from CNY1.82 trillion (US$280 billion) in 2019.144 Another challenge for municipalities in low-carbon These special purpose bonds included support for financing is identifying the value of low-carbon ‘new infrastructure’ – in line with existing high- investments. Different government agencies within level economic objectives, such as data centres, 5G, the same cities usually establish their own data artificial intelligence, and the Internet of Things, systems for city information, often collecting and among others. In the end, however, most of these calculating the same type of data under different bonds ended up in more traditional, energy-intensive definitions and methodologies. This results in sectors. This is a missed opportunity because, inconsistencies and fragmentation that make cross- as outlined in Chapter 1, investing in low-carbon sector joint decisions on infrastructure projects infrastructure now pays back multiples in the future. difficult and benchmarking challenging. Furthermore, In 2021, the central government plans to issue there are few incentives to share data among different CNY3.65 trillion (US$560 billion).145 An immediately agencies, posing an institutional challenge to high-impact recommendation would be to include integrated planning, implementation, and monitoring minimum environmental thresholds for a certain and evaluation. For regional issues like air pollution, percentage of projects. Such requirements, which necessitates a regionally cohesive response, strengthened over time, would be a powerful signal it poses a particularly acute problem. Incompatible that a move to a low-carbon transformation is datasets downstream can undermine financing for needed, incentivising investment into low-carbon low-carbon projects upstream. urban infrastructure. Promoting low-carbon City-level project planning needs to be backed by projects can also help local governments familiarise good data and shared systems. Data-sharing systems themselves with low-carbon projects, making them are being piloted across the country, including a more bankable over time. small project funded by the World Bank that aims to consolidate municipal-level information among GREEN FINANCE a few cities.o The project helps develop a platform Existing government budgets will cover less than that connects data systems from key government an estimated 15 per cent of the total funding for the agencies to be used to inform projects. While this low-carbon infrastructure needed to meet carbon platform effort has many limitations and is not neutrality goals.146 As a result, the large majority of intended to be comprehensive, it is an initial pilot China’s sustainable infrastructure will have to be project to support more consistent and unified financed through non-public sources. definitions and methodologies to demonstrate that this can provide a common basis for integrated Meanwhile, the Chinese government has been o Chongqing, Chengdu, Ningbo and the Chongqing-Chengdu cluster.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 37 ambitiously promoting green finance. In 2016 China Another challenge is that low-carbon infrastructure became the first country in the world to develop a projects tend to require longer preparation and green finance policy framework. But much had been investment cycles than more traditional, often ‘off- done before. In 2012 the People’s Bank of China (PBOC) the-shelf’ projects. The investment cycle of projects issued green credit guidelines, and in 2015 green at the municipality level is typically three to five finance was included in the State Council’s ecological years, significantly shorter than in many other parts civilisation directive. Most recently, in October 2020, of the world.p Innovative low-carbon projects, due the government further released guidelines to steer to their novelty, often require extra time to design investment towards mitigating climate change by and coordinate between developers and government encouraging financial institutions to develop climate- departments. Longer cycles can deter both investors friendly green financial products and financing and local government officials in China, who often for low-carbon projects. By the end of 2020 China’s have their key performance indicators tied to growth. outstanding green project loans had reached around Changes made in the valuation of projects and the 147 US$1.9 trillion, the largest amount globally. project time horizons would effectively increase the Despite this clear direction from the central cost of financing high-carbon projects as well as government, however, the vast majority of banks and reduce the relative costs of sustainable projects. other financial institutions still lack the information and knowledge of climate risks needed to be able to Green bonds grasp fully the latent market potential of green finance. The development of green bonds has been central In the current system, many types of sustainable urban to China’s green finance framework. In 2015 the infrastructure do not yet have clearly established government issued Guidelines on Green Bonds investment returns that are familiar to creditors. Issuance, which specified issuance procedures as This makes it challenging to channel investment to well as definitions for green assets and sustainable more innovative low-carbon projects. For example, projects and other relevant regulatory measures.149 investors might be familiar with the infrastructure associated with solar power – an investment path that Since then, their relatively simple structure and has been well worn – but may be less familiar with transparency requirements have contributed to the other interventions such as nature-based solutions. rapid growth of the market for green bonds. In 2019 China led the world by issuing green bonds worth A powerful step would be to require greater US$55 billion.150 Many Chinese provincial and local disclosure of the environmental impact of the governments have contributed to this momentum projects and assets in which financial institutions by issuing their own guidance documents on green invest. Currently, many financial institutions are not finance. Currently, there are at least five pilot green incentivised to share environmental information. A finance zones, where banks and other investors can survey conducted in December 2020 of Shenzhen- access a variety of incentives for low-carbon projects. based financial institutions showed that only By the end of 2018, Chinese local government entities a quarter had transparent guidelines on their had issued green bonds worth nearly US$6 billion. environment-related investment activities.148 A lack of compulsory requirements as well as a lack Despite this progress, a range of bottlenecks need to of unified standards were cited as impediments to be addressed. One of the core barriers to green bonds environmental information disclosure. In March is limited awareness and difficulty for investors in 2021 Shenzhen will require financial institutions to identifying sustainable assets and projects, meaning disclose environmental impact – the first time a local that investment-ready sustainable projects are not 151 government in China has called for such a mandate. always apparent. The underlying issue stems from The Shenzhen rules could set the basis for a national the fact that many of these assets have not yet been rule, paving the way for the roll-out of transparent standardised or categorised, so that even if investors environmental information. are keen, they are often unable to locate them. p The average length of many related types of loans from Chinese banks is about two to five years. Thus, if funding is needed for a 10-year project, for example, it would require raising funds five times, significantly increasing investment risks. Many sustainable projects in subways, railways water treatment, solid waste etc. have lengthy investments periods which might take 10 or even 20 years before investments generate a return, far beyond the current loan periods of most Chinese banks.

38 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality In the long term, a unified and robust taxonomy „ Prioritise strengthening systems for data system would help China’s green finance objectives. collection and data sharing. Currently, there are two types of green bond and credit Increased consistency and unified definitions standards; green financial bonds are guided by one and methodologies can provide a common basis set of standards, while corporate bonds are guided by for integrated planning and decision-making. This another. The development of a clear and overarching would also enable the monitoring of performance taxonomy system would reduce uncertainty about and progress of low-carbon investments, which what is considered low-carbon, sustainable or could inform and attract financing. green, thereby lowering transaction costs to enter the market. Furthermore, identifying what makes „ Include minimum environmental thresholds a project low-carbon is one major task, but equally for projects funded by special purpose bonds. important is defining shadow, or ‘brown’ project Connecting special purpose bonds with goals parameters. Green bonds are currently exclusively for sustainable urban development can be focused on low-carbon sectors; it is important to introduced and phased in incrementally. Such create a viable, credible pathway that would enable requirements, strengthened over time, would be the greening of existing ‘brown’ projects in other a powerful signal to incentivise investment in sectors, like cement, steel and plastics. low-carbon urban infrastructure.

China recently made changes to its Green Bond „ Scale up environmental information Endorsed Project Catalogue (2020 edition). This acts disclosure. as a consolidated resource for domestic guidelines, Environmental information is a crucial step removing the need to consult different documents in further growing the development of green depending on the type of bond. Significantly, it finance. In particular, it will help financial removes ‘clean coal’ from being considered as institutions assess and take stock of environment sustainable, a meaningful effort that moves China risk liabilities and create greater transparency in the direction of aligning with global standards of in their investments. It can also set the green guidelines and criteria. For regulators, issuers foundation for a more market-based approach and investors, this can considerably simplify the to low-carbon finance. process of identifying green assets, opening the door „ Develop a clear taxonomy system for to greater international participation.152 green bonds that defines the difference between sustainable and ‘brown’ projects or SUMMARY OF RECOMMENDATIONS infrastructure. „ Develop stable own-source revenue streams China’s green bonds are currently regulated at the municipal level. by many different groups. Although efforts Own-source revenues enable cities to provide have been made to standardise domestic green financial sustainability and create the appropriate bond standards, there is still much to be done. incentive structures for infrastructure projects. Alignment of domestic and international green Several well-designed local taxes would be definitions could entice global investors, reduce effective, including ‘piggyback’ taxes on the transaction costs, and reduce regulatory barriers national emissions trading system and on income to market entry. Furthermore, all green bonds taxes, as well as a beneficial property tax.153 are currently exclusively focused on sustainable Shared revenues often fluctuate in response to the sectors; it is important to create a viable, changing priorities of the national government, credible pathway that enables the greening making it difficult to anchor a system of local of ‘brown’ projects in other sectors, such as government bonds or the managing of liabilities.154 cement, steel and plastics.

Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 39 Green riverbank along the Yangtze in Wuhan. Credit: Keitma / Shutterstock.

The way forward

Climate change is the key global issue contemporaneous pandemic, boosted by recovery measures. China is with China’s rise to economic prominence. The global at a unique juncture to drive an ambitious sustainable response to this environmental challenge will in large and low-carbon transformation, riding on strong part determine the material and social wellbeing of our economic tailwinds. planet in the coming decades. This reality is already A focus on an urban development model of clean, transforming the global economy towards new low- carbon and sustainable business models, a trend that compact and connected cities during the 14th Five- will undoubtedly accelerate. 2021 will be a pivotal year, Year Plan period can place China on a long-term as the major economies emerge from the COVID-19 trajectory for better quality economic growth and further demonstrate China’s commitment to and leadership of the global cooperative actions against A focus on an urban development climate change. It is also a critical step in ensuring competitiveness in a carbon-constrained world. model of clean, compact and To act at scale will require massive investment in connected cities during the 14th low-carbon and sustainable urban infrastructure, a transition to cleaner energy and a rethink of the Five-Year Plan can place China on urban form of Chinese cities and their planning. a long-term trajectory for better Although the challenges to achieve this are great, the economic benefits of action are greater still and quality economic growth. vastly outweigh the costs.

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55 Ibid.

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58 Coalition for Urban Transitions (2021) Seizing China’s Urban Opportunity: Cities at the heart of the 14th Five-Year Plan and a national vision for net-zero emissions. https://urbantransitions.global/en/publication/chinas-new-urbanisation-opportunity-a- vision-for-the-14th-five-year-plan

59 Varro L, Fengquan A (2020) China’s net-zero ambitions: the next Five-Year Plan will be critical for an accelerated energy transition. IEA commentary. https://www.iea.org/commentaries/china-s-net-zero-ambitions-the-next-five-year-plan-will-be- critical-for-an-accelerated-energy-transition

60 US Energy Information Administration (2020) Today in Energy China’s crude oil imports surpassed 10 million barrels per day in 2019, 23 March. https://www.eia.gov/todayinenergy/detail.php?id=43216#:~:text=China’s%20annual%20crude%20oil%20 imports,the%20United%20States%20in%202017

61 Rentschler J (2013) Oil Price Volatility, Economic Growth and the Hedging Role of Renewable Energy. World Bank Policy Research Working Paper. https://openknowledge.worldbank.org/bitstream/handle/10986/15829/WPS6603. pdf?sequence=1&isAllowed=y

62 Mealy P, Hepburn C (2017) Transformational Change: Parallels for addressing climate and development goals. https://www.researchgate.net/publication/333039741_Transformational_Change_Parallels_for_addressing_climate_and_ deveopment_goals

63 Research and Market (2020) Global Smart Cities Market – Forecast to 2025. https://www.researchandmarkets.com/ reports/5146372/global-smart-cities-market-by-smart

64 Business Korea (2019) S. Korea to Create 1.5 Tril. Won Fund to Boost Smart City Exports. Business Korea, 11 February. http://www.businesskorea.co.kr/news/articleView.html?idxno=28986

65 Hepburn C, Stern N, Xie C and Zenghelis D (2020) Strong, sustainable and inclusive growth in a new era for China – Paper 1: Challenges and ways forward. London: Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science.

66 Vivid Economics (2021) China: Pivoting towards Ecological Civilzation in Cities. COP26 Special Report Briefing Note for Coalition for Urban Transitions.

67 Coady D, Parry I, Le N-P, Shang B (2019) Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates. IMF Working Papers. https://www.imf.org/en/Publications/WP/Issues/2019/05/02/Global-Fossil-Fuel-Subsidies- Remain-Large-An-Update-Based-on-Country-Level-Estimates-46509

68 Ibid.

69 Ibid.

70 Ibid.

71 Stern N and Xie C (2020) China’s 14th Five-Year Plan in the context of COVID-19: Rescue, recovery and sustainable growth for China and the world. London: Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science. https://www.lse.ac.uk/granthaminstitute/publication/chinas-14th-five-year-plan-in-the- context-of-covid-19-rescue-recovery-and-sustainable-growth-for-china-and-the-world/

72 Ahmad E, Stern N, Xie C (2020) From rescue to recovery: towards a post-pandemic sustainable transition for China. Working paper, China Development Research Foundation. https://cdrf.org.cn/jjh/pdf/towards%20a%20post-pandemic%20 sustainable%20transition%20for%20China.pdf

73 Science Daily (2014) Migration, brain drain in china: Shifting slightly, but still going strong. Science Daily, 13 March. https://www.sciencedaily.com/releases/2014/03/140313142714.htm

44 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 74 Ahmad E, Stern N, Xie C (2020) From rescue to recovery: towards a post-pandemic sustainable transition for China. Working paper, China Development Research Foundation. https://cdrf.org.cn/jjh/pdf/towards%20a%20post-pandemic%20 sustainable%20transition%20for%20China.pdf

75 Qi Y, Song Q, Zhao X, Qiu S, Lindsay T (2020) China’s New Urbanisation Opportunity: A Vision for the 14th Five-Year Plan Coalition for Urban Transitions. London, UK, and Washington, DC.https://urbantransitions.global/wp-content/ uploads/2020/05/China%E2%80%99s_New_Urbanisation_Opportunity_FINAL.pdf

76 Ibid.

77 Vivid Economics (2021) China: Pivoting towards Ecological Civilzation in Cities COP26. Special Report Briefing Note for Coalition for Urban Transitions.

78 Kruize et al (2019) Urban Green Space: Creating a Triple Win for Environmental Sustainability, Health and Health Equity through Behavior Change. International Journal of Environmental Research and Public Health. 16(22): 4403. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6888177/

79 Hepburn C, Qi Y, Stern N, Ward B, Xie C, Zenghelis D (2021) Towards carbon neutrality and China’s 14th Five-Year Plan: Green COVID-19 recovery, sustainable urban development and clean energy transition. London: Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science. https://www.lse.ac.uk/ granthaminstitute/wp-content/uploads/2021/01/Towards-carbon-neutrality-and-Chinas-14th-Five-Year-Plan.pdf

80 Stern N, Xie C, Zenghelis D (2020) Strong, sustainable and inclusive growth in a new era for China – Report 2: Valuing and investing in physical, human, natural and social capital in the 14th Plan. London: Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science. https://www.lse.ac.uk/GranthamInstitute/ wp-content/uploads/2020/04/EFC-Report-2_Valuing-and-investing-in-physical-human-natural-and-social-capital-in-the-14th- Plan-2.pdf

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86 Coalition for Urban Transitions (2021) Seizing China’s Urban Opportunity: Cities at the heart of the 14th Five-Year Plan and a national vision for net-zero emissions. https://urbantransitions.global/en/publication/chinas-new-urbanisation-opportunity-a- vision-for-the-14th-five-year-plan

87 Ye Q, Song Q, Zhao X, Qiu S, Lindsay T (2020) China’s New Urbanisation Opportunity: A Vision for the 14th Five-Year Plan. London and Washington, DC: Coalition for Urban Transitions. https://urbantransitions.global/en/publication/chinas-new- urbanisation-opportunity-a-vision-for-the-14th-five-year-plan/

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97 Cui Y, Hultman N, Edwards M, Bowman C, Clarke L (2020) A High Ambition Coal Phaseout in China: Feasible Strategies through a Comprehensive Plant-by-Plant Assessment. College Park, MD: University of Maryland Center for Global Sustainability.

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99 Coalition for Urban Transitions (2021) Seizing China’s Urban Opportunity: Cities at the heart of the 14th Five-Year Plan and a national vision for net-zero emissions. https://urbantransitions.global/en/publication/chinas-new-urbanisation-opportunity-a- vision-for-the-14th-five-year-plan

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46 Accelerating China’s Urban Transition: Priority Actions for High-Quality Growth and Enhancing Leadership for Carbon Neutrality 108 Deren L (2019) Smart City Construction is a ‘Top Leadership Project’ in Need of ‘Business Wisdom. People.cn, December 18. http://scitech.people.com.cn/n1/2019/1218/c1007-31512424.html

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130 Ibid.

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136 Ahmad E, Colenbrander S (2020) Financing a Sustainable and Inclusive Urban Transition in China. London and Washington, DC: Coalition for Urban Transitions. https://urbantransitions.global/en/publication/financing-a-sustainable-and-inclusive- urban-transition-in-china/.

137 Ahmad E and Zhang X (2020) Local government liabilities and sustainable debt in China—evidence from County T in Central China. LSE/Coalition for Urban Transitions Programme on Financing Sustainable Urban Transitions in China and Mexico.

138 Ahmad E, Stern N, Xie C (2020) From rescue to recovery: towards a post-pandemic sustainable transition for China. Working paper, China Development Research Foundation. https://cdrf.org.cn/jjh/pdf/towards%20a%20post-pandemic%20 sustainable%20transition%20for%20China.pdf

139 Ahmad E, Stern N and Xie C (2020) From rescue to recovery: towards a sustainable transition for China after the COVID-19 pandemic. London: Grantham Research Institute on Climate Change and the Environment and Centre for Climate Change Economics and Policy, London School of Economics and Political Science. https://www.lse.ac.uk/granthaminstitute/wp- content/uploads/2020/10/From-rescue-to-recovery_Towards-a-sustainable-transition-for-China-after-the-COVID19- pandemic.pdf

140 Ahmad E, Colenbrander S (2020) Financing a Sustainable and Inclusive Urban Transition in China. London and Washington, DC: Coalition for Urban Transitions. https://urbantransitions.global/en/publication/financing-a-sustainable-and-inclusive- urban-transition-in-china/

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142 Ahmad E, Colenbrander S (2020) Financing a Sustainable and Inclusive Urban Transition in China. London and Washington, DC: Coalition for Urban Transitions. https://urbantransitions.global/en/publication/financing-a-sustainable-and-inclusive- urban-transition-in-china/

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152 Ibid.

153 Ahmad E, Colenbrander S (2020) Financing a Sustainable and Inclusive Urban Transition in China. London and Washington, DC: Coalition for Urban Transitions. https://urbantransitions.global/en/publication/financing-a-sustainable-and-inclusive- urban-transition-in-china/.

154 Ahmad E and Zhang X (2020) Local government liabilities and sustainable debt in China—evidence from County T in Central China. LSE/Coalition for Urban Transitions Programme on Financing Sustainable Urban Transitions in China and Mexico.

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